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[hippoland]

Should you raise money or bootstrap?

Should you raise money or bootstrap?  (By bootstrap, I actually mean raise < $250k from individuals / angels).  

Having run a startup that raised money and now in running a VC, ironically, if I were starting a product company today, I would start out with the mentality of bootstrapping for as long as I could.  And, maybe, just maybe, I might consider raising more money under a few limited circumstances.  

I would raise more than $250k if I had a company that:

1) Was growing 30%+ MoM in sales and my operations could not keep up to fulfill those sales

I've noticed for operationally-heavier companies (i.e. not SaaS businesses but generally tech enabled services or alike), it can be easy to grow your sales quickly, but often these companies need to throttle their growth, because they do not have enough people to fulfill these services.  

2) Was a marketplace with high engagement

Marketplaces tend to be "winner take all" businesses, because they are only valuable if both the supply and demand sides are both liquid and efficient.  And, this happens when you have a lot of supply and demand, which means to really thrive, you need to be willing to invest in a land-grab on both sides.  

This is why you see companies like Bird, Lime, et al raise so much money.  They need to saturate cities with scooters and with users.  (basically buy you as a user) In some sense, their businesses are “easier” on the supply side than the current ride-sharing market, because they can manufacture more scooters and don’t rely on people to drive them.  They can create infinite supply.  In the ride-sharing market, supply is basically a zero-sum game.  I.e. someone who is driving for Uber right this moment cannot be driving for Lyft or a food delivering company or what not.  That person’s time is occupied.  The ride-sharing market will change over time with self-driving cars, and that will also become a marketplace with infinite supply which is easier than trying to grab two sides of a market.  But you still need tons of money to manufacture a lot of vehicles.  

3) Was growing net revenue 30% MoM for many consecutive quarters where I felt confident to really pour big money in marketing channels

If your business gets past a certain threshold -- call it past the $2m runrate (series A territory), and you are still growing at a fast clip using a repeatable marketing channel or two that works, then it likely makes sense to step on the gas.  

The caveat is that many companies have a difficult time crossing the $10m runrate -- this is very difficult to do (series B territory).  So you are taking a gamble that with more cash, you can get to series B metrics.  It’s just really hard to keep growing 30% MoM with large revenue numbers.  But also, running a company at that level involves a large team, and it's tough to manage a larger team.  But despite those risks, I would still raise money in this circumstance too.

So what are good bootstrappable companies?

I think the perfect profile of a boostrappable company is a SaaS company. There are often little to no network effects, so your competitors affect you less. I.e. company A using product X doesn't affect company B's decision to use it *most of the time* AND company B being on the platform has no affect on the user experience or value that company A gets out of product X.  There are low operational costs -- software has high margins, so you can often pour profits back into the business to keep growing (at least to a good level).

I also think events businesses are good bootstrappable businesses.  VCs don’t like to invest in these, so it would likely be impossible to raise VC money at any point in time with this type of company.  But, as I've mentioned that events businesses can actually have really low operational costs despite what most people think.  If you can get the venue / food / staff / content all free, then the costs are just marketing and your own salary.  And on the revenue side, you get your money upfront when people buy tickets or sponsors send you money ahead of the event.  And you can often pay vendors on a net 30 basis.  So you get money upfront and pay costs later in most cases.  People often cite scaling as a stumbling block, but if you look at the truly efficient events companies -- Web Summit comes to mind -- they basically just print money and have a scaled playbook to be able to do events all around the world.  

We have a lot of Shin Ramen in our office as a micro VC too.  

I think people often equate bootstrapping with low growth or “lifestyle” businesses (which somehow investors seem to equate with “no money” but not always true).  But, I think that's false.  With the right conditions, bootstrapped companies can be super high growth, high revenue companies.  It’s actually not true that you need VC money to grow really fast.  With high margin and low cost businesses, you can grow really fast without much or any external funding.  And at the end of the road, you can decide what exit you want to take (if even).  You have control over your own destiny in a way that most VC backed companies cannot.  

I also think people think raising VC money is sexy.  It’s like a stamp of approval.  But the truth is, VCs are wrong most of the time!  Most of their startups end up failing.  And the flip side is that there are a lot of great businesses that don’t need VC money to grow really quickly (for all the reasons mentioned above).  

I think ultimately, very often entrepreneurs end up raising money for the wrong reasons or raise money too early.  They think life will be easier if they raise money - the salary would be better and having more help would be better and pouring more money into marketing would be better.  On the surface, I'd say that all of this seems better -- of course we all want more money!  But unless you have found fast growth channels, your people and marketing dollars end up not being put to very efficient use, and you are actually no better off than if you had bootstrapped your company but you have given away more of your cap table.  

So from seeing things as both an entrepreneur who has raised money before and now being a funder of many startups, this is what I would do if I were starting a product company today.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter.

[hippoland]

A dumb American’s perspective on investing in Southeast Asia

We recently announced at Hustle Fund that we will start investing in Southeast Asian software startups, and my new business partner Shiyan Koh, who just moved back home to Singapore, will be leading the charge on that.  

I was in Singapore last week, and I was blown away by the amazing opportunities that Southeast Asian entrepreneurs have ahead of them.  It’s one thing to hear from other people that Southeast Asia (SEA) is up-and-coming, but it was totally another thing to go there and talk with so many people about the future.  

I haven’t seen this movie yet, but it’s not (entirely) quite like this.

Here are a few thoughts that come to mind from just my short trip there.  I’d be curious what other people in-region think about this (and keep in mind, I won’t be doing the investing there, Shiyan will be :) ): 

1) There are opportunities galore

People like to use chronological analogies, so if I had to do that here, I would put investment opportunities in SEA at around 1997.  To add some context here, I loved learning about all the low-hanging fruit investment opportunities there are.  

Basic infrastructure is just being tackled and getting strong traction right now.  For example: payments via Grab and others such as AliPay coming into the region.  Basic marketplaces like Carousell are big / getting big but there are plenty of opportunities for “large niche marketplace” plays to emerge.  

In this first inning of software companies in SEA, major consumer businesses have started taking off, but so many other categories are just starting to emerge.  B2B, for example, hasn’t even even really started as a category yet. (more on this below).  Health is another area that has a lot of low-hanging fruit opportunities and in some countries is less regulated than in the US (for better or worse).  Fintech, too, has many areas that have not yet been tackled -- payments for the banked population is just the first step.  This really resembles the era when in Silicon Valley we had Yahoo, EBay, and Craigslist.  PayPal was not around yet but ideas were starting in payments.  

I think if I were an entrepreneur who was location-agnostic, I would definitely move to Singapore and start a business there.  I can think about 20 clearly big low-hanging fruit opportunities in Southeast Asia that would be great to go after, but in contrast, in the US, it’s really difficult to even think about 1 clearly big opportunity.  Obviously, the US still has plenty of big opportunities ahead of it -- more on that below -- but the low-hanging fruit around “infrastructure” has been established.  Messaging / email generally works.  CRMs / marketing tech generally work.  Ads generally work.  Marketplaces generally work.  Payments work.  Etc.  People in the US can pay for things electronically and can get most services and goods today from the internet -- things in the US generally work, so improvements in these areas are all incremental.  Entrepreneurs can still make money improving these areas, but infrastructure improvements in the US are incremental in contrast to SEA which are right now binary opportunities.

2) Building for Southeast Asia is less about tech and more about hustle

All of the above said, because infrastructure takes a lot of pure brute force and hustle to drive adoption, the kinds of entrepreneurs who will thrive in this type of ecosystem are those with a lot of hustle and strong business mindset.  All the low hanging fruit opportunities that I mention above are not tech revolutions -- they are all about customer adoption.  In many cases, the tech required to execute these businesses have been done elsewhere.  (Payments / marketplaces / etc).  

Customer adoption is always hard wherever you go.  But it’s arguably even harder in a place where there aren’t ready distribution channels.  The interesting thing about the US market is that customer acquisition these days is actually fairly straightforward online now for most customer audiences.  You can build a SaaS company and get to $1m ARR fairly easily while 10 years ago this was very difficult to do.  This is because we now have the infrastructure to be able to look up decision makers on LinkedIn or elsewhere and find online-means to reach people, etc.  In SEA, there are some pieces of infrastructure that have been established and exceed the US.  Mobile penetration in SEA is much higher than in the US (on a volume basis).  This makes it easier to do customer acquisition for a consumer-based company.  But for B2B, for example, decision makers for older businesses can’t be found easily online.  In other examples, if you’re selling to unbanked populations, not only is the customer acquisition hard, but you also have to operationally do things like collect cash, which US startups don’t have to worry about.  

I think this explains why we tend to see consumer businesses emerge first -- tech-savvy internet users are easiest to reach.  Other customer audiences are laggards in adopting the internet.  Startups formed to serve them need to wait until they come online so that the customer acquisition can be faster.  

3) B2B requires selling to other startups

This brings me to my next point.  Throughout my trip, lots of people (investors / startup ecosystem builders / entrepreneurs) told me that they are puzzled why B2B hasn’t taken off yet, and that seems to be the next opportunity.  

Here’s my take on B2B -- if you look at the US ecosystem, most of the high flying B2B companies got to their level of growth because of fast sales cycles.  These fast sales cycles tend to come from selling to other startups.  Slack / Stripe / Mixpanel / Gusto et al grew by selling to software startups.  The accounts start small but increase quickly when some of your startup customers become big within 5 years.  I noticed this with my startup LaunchBit -- we started by selling to startups too, and within a few years, those startups who found success both with us and just in general, grew their accounts with us considerably.  

In Southeast Asia, if you are starting a B2B company right now, you will likely need to be selling to older / slower-moving industries.  And that sales cycle can be long.  But, in 3-5 years or so, if there are a lot of startups that emerge in the ecosystem, then the B2B sales cycle selling to SEA startups will be fast.  Here’s a concrete example: we met with a health company based in Thailand who flew to Singapore to pitch investors.  They showed us how they were communicating with their consumer customers -- all through LINE messenger.  There were literally hundreds of threads of conversations in LINE.  At some point, as the startup grows, those conversations are going to become a real pain to keep track of.  Can you imagine doing all your business in LINE?  (I fully realize that a lot of people do all their business in WeChat in China, etc).  You can imagine that at some point, there will be new marketing automation companies that will start building marketing communication software to allow companies to communicate in a more organized manner en masse via LINE to their customers.  However, this will only become a big opportunity if there are lots of startups using LINE.  So, I think we are probably 3-5 years out for large B2B opportunities to emerge, because first a lot of startups need to get started. 

That said, we are definitely interested in looking at these types of opportunities even as early as now, because they take time to build.  :) 

4) Southeast Asia is fragmented

It’s fun to just lump every SEA country together, but the reality is that SEA is quite fragmented in a way that the US is not.  (i.e. language / culture / regulations / etc -- though sometimes the US seems quite fragmented - hah). 

I think it’s great if startups have large ambitious of serving audiences globally, but it’s really important to tackle one market first well.  

The market that everyone seems to hone in on is Indonesia.  Indonesia has 250m+ people, so it’s close to the size of the US.  But it’s important to further segment.  If you’re trying to go after a banked population that has disposable income, then the addressable segment is probably more like 100m people.  This is still a really large market, though.  

But, once you start talking about population numbers closer to 100m people, then other countries start to rival Indonesia in size.  Vietnam, for example, has strong tech adoption and has nearly 100m people.  Thailand has nearly 70m people.  

From our perspective, I think while it’s important to be cognizant of market size (for example, Singapore has ~5m people but is a great hub for building a business even if not a large addressable market on the island itself), I met a lot of people who were overthinking the SEA market landscape.  As a startup, focus is super important, and nailing your product / service for 1 market of 5m people or 50m people is already really hard to do.  And that 1 market -- whatever it is -- should be the focus before trying to dabble in many markets that all have completely different languages, culture, and regulations.  

However, this seems counter to the advice that many entrepreneurs seem to receive in the region.  If other investors are looking for you to expand to Indonesia even when you’re still tiny, then you may need to think through your strategy on fundraising.  I.e. I fully realize that sometimes you have to adjust your plan to make your company more amenable to fundraising, but at the same time, VCs don’t always have the best advice either.  And this is a tough balance.  So maybe you start with Indonesia if you’re familiar with the market?  Or maybe you start conversations with VCs well before you start your company to understand how people think about addressing one market really well before expanding.  

Garden by the Bay Mid Autumn Decorations

5) Liquidity opportunities for investors are unclear

Ultimately, as an investor, I think about how eventually a company can get liquidity.  And right now, even though some of the markups of high flying SEA companies are good, it’s unclear what the “typical” path of a successful large startup looks like in this region.  

In the 90s, in the US, going IPO was a common liquidity path.  But after consumers became wary of IPOs, M&A became the much more dominant path, though IPOs are coming back in favor again in some cases.  

What this looks like for SEA is unclear and even more unclear is the timeframe.  In China, the path to liquidity can be 5 years or fewer.  In the US, our darling unicorns often take a decade and sometimes longer to exit.  Will large US or Chinese tech companies be purchasing companies for large amounts in SEA?  Is that strategic to them?  Or will these companies go IPO?  And depending on the country, will investors even be able to get their money out once they’ve made money?  These are all questions that we have discussed and frankly don’t know the answer to, but the bet we are making is that this will be figured out in the next few years while our investments mature.  

6) What are opportunities in saturated markets?

This trip got me thinking about opportunities in saturated markets.  In the US, I’d argue that most categories are crowded.  Crowded markets aren’t necessarily bad -- it proves demand.  And if entrepreneurs can get to a certain level, any exit is good for them.  But, for VCs, it’s different.  This is where entrepreneur and VC incentives don’t align.  A lot of VCs -- especially microVCs like us -- will generally sit out of crowded markets, because they don’t have the capital to pour into their companies to compete to become big winners. And smaller exits are not good for VCs, because they really need their winners to make up for their losers plus return more.  We can debate the VC model all day, but that’s another topic for another day.

So in the US, the big opportunities as I see it are: 

Products / software for unserved consumer populations along the lines of gender / race / ethnicity -- fashion tech, for example, is an area that has been long ignored

“Super high tech” that alters how we live life dramatically -- think flying cars and everything that Elon Musk dreams up

Providing software to a new generation of tech savvy people in the workplace / consumerizing B2B software for the phone -- for example, every doctor and construction worker today can use technology but 10 years ago, that was not necessarily the case

This means that entrepreneurs need to be more specialized in skillset than in a landscape like SEA.  For example, if you are an entrepreneur building a new kind of autonomous vehicle, you really need to have a strong engineering background.  On the other hand, if you are building a new kind of ecommerce product for an underserved customer segment, in many cases, you may not need to be technical at all, but you really need to know how to go after your customer persona to be able to out-target more general competitors who are going after a broader segment.  

So what this means is that I think we will still continue to see a lot of really interesting technologies emerge from the US as well as even more products and services that will serve just about every consumer and B2B demographic.  All of these are all still large opportunities, but I think the ideas that win here will just be much harder to come up with.  

Just my $0.02.  Would be curious for your thoughts.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter. 

[hippoland]

It's actually hard to hustle

I should have known that when we picked a company name like Hustle Fund, it would lead entrepreneurs to introduce themselves as “real hustlers”.  But, I think my definition of hustle is very nuanced, and it's not what most people think it is.  

Very often, most people think of "hustlers" as people who are:

super sales-y

slick talkers / great at talking

doing 100 different things all at once

working really hard and wearing that hard work as a badge of honor

One entrepreneur even told one of my business partners that he didn’t think of himself as a hustler because he wasn’t doing anything illegal!  Hah!  

But this is not what “hustle” means to me.  To me, hustle is about scrappiness to achieve to focus.  The key word is focus.  

I think the hardest part about running a startup is having focus.  Focus is the key thing needed to grow a business.  Because you have limited time and money, you can't afford to invest in many different facets of your business. You can usually only afford to do just 1 thing really well otherwise a whole bunch of things will end up turning out mediocre or half-heartedly done - even if you are burning the midnight oil and working really hard.  

This is easier said than done, though.  What this means in practice is saying no to just about everything.  In fact, taking on LESS at a startup in many cases is actually better than taking on more.  This means saying no to meetings that will lead nowhere.  It means not pursuing partnerships that will only produce incremental returns or revenue.  It means simplifying product and reducing features.  Ignoring lots of emails.  Etc.  

As a founder, even with all activities reduced as much as possible, it's still difficult to truly focus, because there are some activities that need to get done in a business that take up a lot of time but don't actually contribute to the growth of your company.  Such as reviewing legal paperwork with your counsel.  Setting up new accounts and adding 2-factor authentication.  Setting up a checking account.  Applying for a credit card.  Etc.  These are all activities that need to get done and take up time that don't actually help your revenue (or whatever your KPI is).

Compounding time management issues, startups also have a lack of resources.  E.g. how do you move your lead gen number when you have no marketing budget?  Even if you are good at time management and saying no?  Being scrappy to achieve focus is just really hard.  

My last thought on this is that the good news and the bad news is that being able to successfully hustle is somewhat of a level playing field (though difficult for everyone!).  By this I mean, I’ve found that the best hustlers come from all walks of life.  People who go to Ivy League schools or worked at Google and Facebook are not necessarily good at hustling (some are and some are not).  Often, people from these places actually are given a TON of resources, so scrappiness is not actually something they know how to hone.  I went from being a marketer at Google where every news outlet wanted to cover all of our product launches to a bootstrapped 2 person startup where no one cared at all.  In addition, people who go to top schools are often very good students.  They are often good at being on top of projects and doing everything.  Unfortunately, at a startup, you have to deliberately drop the ball on a lot of tasks in order to free up time to really really knock 1 thing out of the park.  This is a difficult skill for people who are perfectionists who otherwise excel at non-startup jobs.  On the flip side, I’ve also met entrepreneurs who were not good at following directions at school or work, but are able to do incredibly well with their own startups because they have relentless focus on what matters most to the business at the expense of other things.  

Working on improving my own hustle is something that I strive for everyday -- since Hustle Fund is a startup in itself, we, too, have a bajillion and one things that we need to take care of but really should only be focused on 1 thing at a time.  This means, for example, if we are focused right now on saying helping our portfolio companies, it means that we can’t be responding to everyone who has sent us a pitch deck.  This is fine balance, but something I’ve thought about everyday for the last decade or so since embarking on this startup journey.  

How do you hustle?  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter. 

[hippoland]

Pre-seed is the new seed

A few months ago, I was talking with a friend of mine who is a successful serial entrepreneur.  He has done incredibly well financially on his past two startups, and he's now building his 3rd company.  But when we were talking, he expressed frustration in raising his series A round.  This was surprising to me.  Then I asked him about his metrics, which are good, but they are were not at series A level.  And I asked him who he was pitching, and he rattled off a list of usual suspects on Sand Hill.  All of those investors told him that he was too early.  It turned out he was going after the "wrong" group of investors -- people he would have pitched 3 years ago had all moved downstream now that they had raised much larger funds, and he really needed to be pitching “post-seed” funds.  

Every blog post needs a gif of a stuck kitty... 

It struck me that a lot has changed about the fundraising landscape in even just the last 3 years.  So, I thought it might make sense to take a step back and talk about all the stages of early stage fundraising here in the Silicon Valley.  

In early stage investing, at least in Silicon Valley, there are basically 4 stages: pre-seed, seed, post-seed (or pre-A), and series A.  In the “old days”, there was only seed and series A and before that, only series A!  All of these changes have created a lot of confusion.

Here are my thoughts on these stages:

Pre-seed: this is really the old "seed".  Very typically little to no traction is needed at this stage and investors at this stage are looking for lower valuations than seed investors for taking on extra risk by going in so early.  Another consideration here is that in the minds of pre-seed investors (who are very often small funds and will be allocating most of their capital in the first round or two), valuation matters a lot more to them than a larger fund who might invest in you at this stage as an option for later.  So if a startup comes to me looking for a $3m effective pre-money valuation vs another company who comes to me looking for a $7m effective pre-money valuation, basically what is being suggested here is that the latter company has to have a 2x+ greater exit in order to be just as good of an opportunity as the former.  The outcomes of both companies, are of course, unknowable, but that is essentially what goes through the minds of investors who are looking at lots of companies with different valuations.

Also, to be clear, pre-seed doesn't mean that one just thought up an idea yesterday and has done nothing.  There's a lot of work to do to prepare to raise money at this pre-seed stage.  It could be building an early version of the product.  And/or getting your first set of customers.  Or even doing pre-sales or lead generation well before having a product.  In fintech or health, it could be in dealing with regulations or getting particular approvals even if you’re not able to launch.  

Investors at this stage are very much conviction-investors -- meaning they are either bought into you and your thesis or they are not.  It’s very difficult to convince an investor at this stage to change his/her mind.  This is a bit of a crap shoot, because even if a pre-seed investor is bought into you as an awesome operator, if he/she is not bought into your thesis, it will be difficult to land an investment.

These rounds are typically < $1m in total.  

Seed: today’s well-known, seed investors may have previously invested at an earlier stage with smaller checks, but because many of these funds have now raised $100m+ funds, they are now writing much larger checks.  Typically this is $500k-$1m as a first check.  This means that they have to really believe in you and your business-thesis in order to pour that much capital into a business. As a result, this stage has created a fairly high traction bar.  It can be upwards of $10k-$20k per month or more!  

Seed rounds today are quite large -- typically $1m-$5m!  I believe that some of these seed rounds are way too large, and there’s a looming market correction on the horizon for everyone.  I’m of the belief that early ideas can never effectively deploy $4-$5m in a very cost effective way..   

Post-seed (pre-A): This is a stage that was created, because the bar for the series A has gone sky high.  This really is what the series A used to be.  A few years ago, people touted that in order to raise a series A, you needed to hit $1m runrate.  Now you typically need a lot more traction to raise a series A round.  So, this magical $1m runrate number is now the rough benchmark for the post-seed stage.  But, it's not series A investors who are investing at this stage. New microfunds have cropped up to invest at this stage.  They are looking for $500k-$1m runrate level of traction.  This was my friend’s problem -- he wasn’t quite at series A benchmarks and needed to pitch post-seed investors.  

These post-seed rounds are also quite big these days, sometimes upwards of $5m+.  

Series A: This is really the old series B round.  But Sand Hill VCs who are known for being Series A investors are serving this stage.  This is typically a $6-10m round.  And companies typically have $2m-$3m revenue runrate at this point.  

And if you do the math of VCs buying roughly 20% of a startup, valuations can be upwards in the $50m+ range for today’s series A rounds!  On the low end, I haven't seen a valuation of < $20m, and that would be for a really small series A round.  

Some additional thoughts:

1) There are lots of caveats around traction.

If you're a notable founder / have pedigree or if you are in a hot space, or if you run your fundraising process really well, it's possible to skip a stage.  I've seen some really high flying series A deals happen lately with friends' startups, where they are not quite in series A traction territory, but they have so many investors clamoring for their deal that they can raise a nice big series A round. They've run their fundraising process well, and they generally have great resumes and are in interesting spaces.  Same with the seed round -- if you are notable / have pedigree, you can often raise a large seed round with little to no traction on your startup.

2) Sometimes the line between post-seed and series A is quite blurry but the valuations are very different.  

I have a few founders I’ve backed who are just on the border of post-seed / series A metrics and are able to get term sheets from both series A and post-seed investors.  And there's a huge difference in valuation.  The post-seed deals tend to be $10m-$20m effective pre-money valuation, and the series A deals are at least $20m+ pre-money if not much much higher.  So, if you're on the border, running a solid fundraising process is especially important in affecting your valuation.

3) Large Sand Hill VCs are doing seed again -- selectively.

Sand Hill VCs who tend to invest at the later stages have now found the series B to be too competitive to win.  So they are now starting to do series A deals and seed deals to get into companies earlier.  In many cases, these deals they are doing at seed are large deals with little to no traction.  

You may wonder “Doesn’t this contradict what you just wrote about?”  What’s really happening is that the world of early stage investing is becoming bifurcated -- if you have pedigree and are perceived to be an exceptional high signal deal, you can raise a lot of money without much of anything.  These are the deals you read about in the news that make people think fundraising is so easy. “Ex-Google product executive raises $4m seed round.”  This goes back to point #1.

If you don’t have that pedigree, then you basically need traction to prove out your execution abilities at the seed, post-seed, and series A levels.  

4) Lastly, with the definition of "seed" expanding, more fundraising is done on convertible notes or convertible securities.

I'm now seeing more rounds get done with convertible notes and securities for much longer.  This is actually good for founders, because it means you have a much larger investor pool to tap.  In the "old days", if you couldn't raise a Series A from the say the 20-50 Sand Hill VCs out there, you were dead in the water.  Now, you have a lot more flexibility to raise from angels and microfunds without a formal equity round coming together.  I think this is a really good thing for the ecosystem, because at this stage, it’s still not clear who is a winner based on metrics.  So there’s still a lot of pattern matching that happens around who gets funded at these early stages.  By the time you get to the series B level, it’s pretty clear who is on a tear and who is not, and that is much more merit-based investing.  But short of that, the more angel investors we can bring into the ecosystem of startup investing, the more companies will get a shot to prove themselves.  

You may wonder, “Well, are there actually companies that are being overlooked by VCs in earlier rounds who later are able to hit series B metrics and raise a VC-backed series B round?”  Having looked at a lot of data around this, the answer is definitely YES!  While it’s true that the vast majority of companies who end up raising a series B round from VCs previously had notable institutional VC backers even as far back as their seed rounds, VCs still end up misssing a number of companies at the earlier stages.  And these actually go on to do well without them and end up coming out of left field and raising money from late stage VCs.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter. 

[hippoland]

Why an investor rejection isn't a knock on you

A few years ago, a friend asked me if I could forward an email to Abc VC.  I told him that since that Abc VC didn't invest in my company, I wasn't sure if Abc VC thought highly of me.

Now that I sit on the other side of the fence, I realized that my thinking was flawed.  In many cases, if a VC declines to invest in your company, it isn't a knock against you (caveat being unless you've acted really rude to him/her and/or his/her team).  In most cases, rejections happen well before even meeting a team, so that VC doesn't even know you!!

Here are a few reasons why an investor will reject you that has nothing to do with you.  

1) Your idea is undifferentiated

Investors see thousands of businesses a year.  And, your idea is 50th social networking site of the week.  Unless you have a differentiated angle / approach to the problem AND/OR significant traction, an investor won't be able to understand why you stand out and why to back your horse instead of someone else's.  Especially at the early stages.  

Note: by differentiation, I'm not talking about product or feature differentiation but outcome differentiation.  For example: if you're creating a new Mailchimp competitor, you might think your product is differentiated if let's say your product has better tracking than they do.  That's a feature difference.  But outcome-differentiation is probably lacking -- people who use Mailchimp use it to increase revenue by selling more products / services via their emails.  So unless your feature can increase that outcome -- and not just incrementally by 20% but a serious differential like 10x -- it's unlikely that a current happy Mailchimp customer will want to switch to your product.  Think about it -- if you’re using MailChimp and make let’s say $100 in sales for every send.  It’s going to be a real pain in the neck to move to a new product -- your whole list is set up and everything for just an additional $20 per send.  

Often as an entrepreneur, it's hard to know whether your product is differentiated, because you don't know what other startups are out there.  This is something I personally faced when running my company LaunchBit.  There were/are so many freakin' ad networks / ad exchanges / ad platforms out there that LaunchBit was just undifferentiated.  A business like that will just have a really hard time raising money at the early stages, and if that's feedback you are getting from at least 2 people, you may want to consider adjusting your plan and raise from angels and/or bootstrap for a long time.  It doesn’t mean it’s a bad business -- in fact, it could be a very good business for you.  It just means VCs will shy away from it.  

2) Your idea is not the right fit for stage / industry.

Your idea is not a good fit per the investor's thesis / mandate.  Sometimes this can be incredibly difficult to see. For example, a lot of software investors don't invest in e-commerce companies.  (We do not.).  The products are physical things that cost a lot to store as inventory, and fundamentally, this makes e-commerce companies a very different profile from products that are entirely digital (software / software platforms that don’t house inventory / digital products / etc).  

Or, a lot of investors call themselves "early stage" investors and aren't good fits for pre-seed companies.  Many of these investors mean "series A" or "post seed" when they say "early stage" even though they will do a handful of pre-seed deals in founders they already know / successful serial entrepreneurs we’ve all heard of.

What I’ve found to be most annoying about the VC industry as an entrepreneur is that you can never pin VCs down in what they like.  This is because VCs are always hedging to be able to see everything just in case there is that rare exception that they would potentially invest in something outside of their thesis.  The best way to assess what VCs actually like is to look at their portfolio.  If a VC says that they invest without traction, you should find out when they’ve done so and whether it's because they already had deep relationships with that team / that team has incredible pedigree.  And just play the probabilities in your head of who will actually be likely to invest in a random company at your stage.  

3) Your business model seems flawed OR is not the right fit

I talked a lot about unit economics and sales cycles in my last post.  For me, I personally think very heavily about the unit economics of a business, and if I can't get conviction around the potential customer acquisition, that's an immediate pass for me regardless of the team / market size / product / etc.  I do understand that teams can pivot, but we are already so early in the lifecycle -- often first check into a company -- that I can’t be counting on pivots.  

But VCs look at unit economics in different ways.  For example, some VCs have such deep pockets that they can throw a lot of money at a company to wait out a long sales cycle.  But that's not Hustle Fund.  We are currently a small fund.  So when we back a company, we need to believe that we can help that company get downstream funding from other investors with deep pockets OR that the company can bootstrap its way to success.

In order to bootstrap your way to success, it largely means you need high margins and fast sales cycles.  These are companies that we can get behind as a lone ranger if we see hustle, focus, and a differentiated solution.  

But, if you're in a category where you have a long sales cycle or smaller margins, then I need to think about if I can "sell" your deal to other investors -- either people who will invest alongside us or after us.  We talk with and do try to understand what a lot of our early stage investor peers are interested in to help inform our decision.  But the point is, when we are looking at companies with these type of customer acquisition qualities, we cannot make decisions in isolation.  We need to believe other investors will buy into you as well even if we are still first check into your company.  

3b) The market size is not big enough

For a VC portfolio to work out, a VC's winners need to compensate for all the losses of the losers plus much more to provide great fund returns.  Not only does the fund need to be net profitable, but it also needs to outperform other assets that our would-be backers could be investing in -- such as other VC funds, real estate opportunities, the public stock market, etc..  No one really talks about how VCs differentiate themselves and what they need to deliver to their investors, but this is a big factor in affecting how they invest in companies.

So, for a VC, it's not good enough to have a winner "only return 10x" even though that would be a phenomenal outcome for a founder or even an angel.  Most VCs need their winners to return 100x (or ideally more).  

This is why it seems that every VC is harping on looking for billion dollar markets.  If you are not thinking you have that big of a business, VCs are not going to be the right people to raise from.  Angels might be a better fit.  

But, for me personally, I think the problem with market-sizing exercises is that you just don't know whether a market is big or not!  Airbnb is probably the poster child example of this.  At the seed stage, it seemed like a weird niche idea to sleep on someone else's air mattress.  What is the market size for this?  Basically zero.  But sleeping on a bed in someone's house is an alternative to getting a hotel room, and the hotel market is huge.  So it's just very difficult to know whether a market size is big or not in the early days, especially for seemingly "weird" ideas.  

This is why I don't care to ask founders about their market size.  Their predictions will be wrong and so will mine.  Moreover, even if a market is big, it doesn't mean the company can grab a lot of that market share.  This is why I very much focus on a bottoms-up approach to analyzing a marketing -- looking at unit economics / sales cycles / customer acquisition.  If the unit economics and sales cycles are rough, I don't care how big the market is, it's going to be a long difficult slog to capture the market, and that means a very capital intensive business.  And then that goes back to the question of whether I think I can round up co-investors with me or downstream investors to fund this.  

In short, these are 3 reasons why a VC might reject your business when they haven't even looked at your team or anything else about your company.  It doesn't mean you necessarily have a bad business, it just might not be the right fit for that particular firm or the VC industry in general.  So in most cases (caveat being if you were rude to someone on our team), when we decline to invest in companies, we would very much welcome seeing a different business that the founder starts later or would be honored if the founder wanted to take the time to refer a friend who is working on a startup.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter.

[hippoland]

The #1 thing successful founders think about for their next startups

At Hustle Fund, we back both first time founders as well as repeat founders.  One thing I've noticed is that almost every repeat, previously-successful-founder focuses on the same thing for their respective startups: customer acquisition.  These founders not only think about customer acquisition first, but in many cases, they will even:

Abandon a startup idea altogether if the customer acquisition strategy isn't strong

Pre-sell / generate leads well before building a product to try to validate demand

Some thoughts on customer acquisition from my own learnings over the years both as a startup operator and talking with a lot of startups:

1) Unit economics matter A LOT.  

Unit economics are something I've found most entrepreneurs (and investors!) don't think about at all.  Forget about traction and hockey stick growth.  It's hard to get there without ideal unit economics.  Very simply, your cost to acquire a customer needs to be lower than the value of that customer (lifetime value).  

This is obvious.  Diving in a bit more into some thoughts here:

1b) Ad-based revenue streams generally have terrible unit economics.  

A typical ad-based revenue stream on a media website is around $5 per 1000 eyeballs ($5m CPM and give or take $1-$20ish CPMs).  In other words, if you can get 1000 people to come to your website consistently for under $5, then this business model works for you.  But this is incredibly hard to do, and most sites cannot do this at scale.  As always, there are exceptions: if you build a viral consumer product (such as an Instagram) where people are just coming to your site / app in droves at no cost to you, then you've got a great business.  But, if they are not, it's very hard to use paid acquisition to generate that type of traffic for under $5.  

As a result, second time founders very often shy away from ad-based consumer ideas, but when they do, they think about what viral mechanisms you can implement *first* and engineer the product around that mechanism.  Marketing first.  Product second.  Here is a good case study on LinkedIn (scroll down to see how they grew).  Or second time founders focus on lucrative verticals that pay more per eyeball or focus on ad formats that pay more (such as email newsletter sponsorships). 

Ads can also be cost-per-click or cost-per-action ads.  Although you can make more money by running per-click or per-action ads on a per conversion basis, it's also a lot harder to bring about these actions.  In particular, one thing to consider if you're trying to make money off affiliate ads is to think about how unique the product/service is in the ads you're running.  For example, if you are running affiliate ads for hotels, you might get 3-5% on a sale.  So if someone books a hotel at say $100, then that means you make say $5 on that transaction.  But if this is a generic hotel, then there are likely other affiliates who are doing paid marketing to try to get users to their sites / apps to convert users as well.  Moreover, the hotel itself may be running ads to drive traffic to their site / app, and for them, a conversion is worth far more than $5.  So you will likely get outspent on any paid marketing channel you may use to drive traffic to you at scale if there are other people trying to drive traffic to the same property.  

Even if you are not scaling with ads, partnerships and SEO also cost money, and your competitors or even complementary companies are all spending money on partnerships and SEO in order to drive as much traffic as they can.  One way to make an affiliate-ad based revenue stream work is to have access to unique products that no one else online is trying to sell.  This could mean partnering exclusively with someone who makes products offline (and who is not tech savvy to compete online with you).  

Another way is to have unique promotion channels, but these must be scalable.  Honey, for example, is a browser extension that is always in your browser and helps find coupons for you for any site you browse.  This allows them to retain users for a long time and make some affiliate revenue by directing you to particular offers that they get paid for.  Or, there are some hardware companies, for example, that make money based on affiliate revenue. They sell their hardware at cost -- say a new refrigerator.  And, when you buy food on a recurring basis, then they make recurring revenue by your buying food through their affiliate channel.  You will use your fridge for a decade or more so the retention here is high.  

There are clearly many companies making money on ads of some sort, so this is not to say that you cannot build a big company with ads.  You definitely can and there are many who do.  But, remember, the key insight is you need your revenue stream to be much more lucrative than the cost to acquire your customers who generate that revenue.  

2) B2B startups have high margins.  Sales cycles matter though.

Many serial entrepreneurs tend to gravitate towards building B2B startups.  I can't tell you how many founders I know whose first company was a consumer company and then built only B2B companies after that.  B2B companies can have great unit economics.  Business customers, depending on the problem, are less price sensitive than consumers.

HOWEVER, the length of a sales cycle is a strong consideration for most repeat successful founders.  For repeat founders, this can actually work BOTH WAYS.  

On one hand, I know some really successful founders actually opt for a *longer sales cycle*.  (I use "sales cycle" loosely -- by this I mean the time it takes to get a product paid for, and so this involves both product development and time to get a check from a customer). Some successful founders would prefer to go after a REALLY lucrative revenue opportunity that has a "longer sales cycle", because they can capitalize their company long enough with their own money + friends' money to gain the sale.  In some sense, their moat is capital, because most people will not be able to access enough capital (either by raising or by bootstrapping) to go after a similar opportunity.  Examples of this include startups that are building a new airplane or a new car or a rocketship or a new power plant, etc...  Most first time founders cannot just start bootstrapping a new rocketship startup.  

Sales cycle, as a consideration, also works the opposite way.  Many repeat successful founders would also actually prefer to go after opportunities with a much shorter sales cycle.  So if we use Christoph Janz' animal framework for building a big business for types of customers you can be going after, these founders won't be hunting elephants.  But they might go after rabbits or deer business customers.

And, because these companies are often able to move a lot more quickly than elephants, founders can often pre-sell before a product is ready.  Or at a minimum, generate a lot of leads before building to generate momentum and start to validate a business opportunity with real people and real money.  This pre-sales strategy, of course, can also be used for consumer businesses that sell things.  

As a side note: many companies in our portfolio at Hustle Fund, regardless of what they're building, have pre-sold their products before building anything.  

3) Does your business have naturally short retention?  

Repeat successful founders also think a lot about retention.  Some ideas seem like a good ideas but actually are not because of the retention component.  (or lack of). Here is an example:

I used to run some wedding-related sites; there's obviously a real need for products and services in the wedding space.  And, engaged couples pay a lot for weddings!  On the surface, this seems like a good space to be in.  But, the retention is terrible / non-existent.  Once someone gets married, in many cases, this person won't ever come back and generate revenue (or at least not for a decade later).  (Although I did once have a customer who bought from me, then called off the wedding, and then a few months later came back to my site to buy more, because she was now engaged to someone else.  But the vast majority of my customers were not in this camp.). This is not to say that you shouldn't do a wedding-related startup, but it's important to think about how to retain a customer to convert him/her towards other things.  

The Knot is a great example of a site in the wedding category that tries to retain people.  The Knot would not consider themselves a "wedding company".  They would consider themselves a "lifestyle company" -- they retain their users by moving their users to "The Nest" and later "The Bump" as you start settling down into married life and then have children.  This allows them to make money on their users for a much longer timespan.  

Retention applies to B2B companies as well.  For example, there are a lot of startups who offer products/services to startups.  When their customers outgrow them and become big companies, can they grow with them and offer products that make sense for larger companies?  Hubspot is a good example of this.  Initially, they focused on SMBs, but today, a lot of enterprise businesses use them.  But they still do partnerships with startup organizations/accelerators so that startups can start using their platform and grow up in the Hubspot ecosystem.  

So if you are starting a company around a person or a business' stage of life, think about how you can retain your customers / users over time.  

4) It's nice when someone else pays for a customer.

This is a very rare customer acquisition situation, but in some cases, a company can jump on an opportunity where a consumer benefits but someone else pays on behalf of the consumer.  This is nice, because the consumer gets something for free and is your user/customer.  So, the customer acquisition is easy, because this person doesn't need to pay money.  And, someone else is footing the bill and must do so.  This is a fantastic customer acquisition situation.  

This type of scenario often happens in weirdly regulated situations.  In health, for example, almost all online pharma startups are in this category.  A startup gets a consumer to sign up for service to get his/her medication for free.  His/her insurance must pay for it.  

This type of inefficiency happens in other industries as well and is something that I personally look for.  So, we've backed a couple of companies that fall into this category (they are not all health).  The customer acquisition is incredibly fast and high growth (i.e. easy to convert users when something is free to them and that something is awesome).  

In summary, when I evaluate startups, a big initial criteria for me is around evaluating how deeply the founders have thought about customer acquisition (and retention) and whether they are customer acquisition-centric founders.  This does not mean the founders need to have marketing and sales backgrounds; in fact, most of our founders do not have this background.  But, thinking about the unit economics as a business owner BEFORE building your product is incredibly important regardless of your background.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter.

[hippoland]

11 Things I've learned from running a micro VC in the last year

It's been about a year since I started working on Hustle Fund with my business partner Eric Bahn.  People often ask me what it's like to start a micro VC and whether they should do one too.  (Hunter Walk just wrote his perspectives here) 

Here are some of my learnings from the last year.  

1) It is absolutely the best job in the world for me.  

I enjoy learning about new technologies and ideas -- and you get to see a lot of them in this business especially in early stage investing.  And I enjoy working with founders immensely.  But most importantly, I love fundraising.  I know -- that isn't what you thought I was going to say.  (more on this later)

Much like running a product-startup, you're your own boss, so you sometimes end up working really hard and at all hours depending on where you are in your fund life cycle.  But, if it's work you enjoy, then it doesn't feel like work.  And, there's also a lot of flexibility, and I've definitely taken advantage of that.  You can whimsically pick the most powdery day of the winter and go up to Tahoe to ski.  Or go to the beach or lake mid week in the summer and no one will be there.  It's great.  

2) Starting a micro VC is just like starting a product company.  Except harder. 

Probably 10x harder.  If you go in knowing that with eyes-wide-open, then it's totally fine, but most people don't do enough homework before deciding to start their funds.  I would talk with at least 10 micro VCs before deciding to do this.

3) In particular, there is no money in micro VC!

Hah - this seems ironic, but I'll explain.  

Most people think VCs have a lot of money.  That's if you work for an existing large established VC.  But if you are starting a VC, this is definitely not true.  I'll break this down across a few points, but the gist is that you have to be willing to make no money for 5-10 years.

If you are not in a solid financial situation to do that, this business can be terrible for your personal life.  

3b) Micro VC's have no budgets.  

This is surprising to a lot of people.  Even if you have say, a $10m fund, most of that money needs to be used for investing -- not for your livelihood or for other things.  

In fact, the standard annual budget that VC funds have is 2% of the fund size for the life of the fund (typically 10 years).  If your fund is say $10m, then that means you have a yearly budget of $200k.  To be clear, this isn't your salary -- this is your budget to run your company.  Your salary does come from this number, but you also need to cover salaries of everyone else on your team (if there are others on your team).  And, if you travel, those costs come from this number too.  If you have an office, that cost fits in here too.  Health care and benefits also fit under this.  Marketing -- if you have t-shirts / watches / swag, parties -- all of this fits under this budget.  There are also fund ops costs that need to be factored into this number too.  As it would turn out when you factor in all these costs, $200k actually doesn't go far.  To give you some perspective, my salary today is less than what I made at my first job out of college...in 2004. 

You need to be willing to bootstrap for about 5-10 years.  In contrast to building a product company, where most people bootstrap for maybe 2-3 years and then either raise some money or build off of profits or throw in the towel, when you sign up to do your own VC, you are committed for 10 years (the standard life of a fund).  You can't throw in the towel.  And if your fund does well -- i.e. your companies either raise more money or they grow their revenues a lot -- you also don't make more money, because your salary is based on a percentage of your fund size.  So your salary (or lack of salary) is stuck for years -- until you raise your next fund when you will have new budget from that fund.  

Some Micro VCs write into their legal docs that they will frontload all of their budget in the first few years.  Under this model, instead of taking say a $200k budget per year for 10 years, some funds will do something like frontload the budget -- say $400k per year for 5 years.  This can help increase your budget, though there are still fund ops costs every year for 10 years, so I'm not sure how these funds end up paying for those costs in years 6-10 if they are taking the full budget up front.  This is not something we do at Hustle Fund.  

Other micro VCs will try to make money in other ways by selling event tickets or whatnot.  In many cases, depending on how your legal docs are written, consulting is discouraged.  So it actually is very hard to bootstrap a micro VC, because on one hand, you get virtually no salary but are also mostly prohibited from making money outside of your work.  

3c) You also will make General Partner contributions to your fund.

At most funds, you will also invest in your fund as well.  This allows you to align with your investors and have skin in the game, and this is standard practice.  In many cases, fund managers invest 1-5% of the fund size.  So if you have a $10m fund, you'd be expected to invest at least $100k to the fund.  

So, not only are you not making money on salary, you are also expected to contribute your own money to the fund.  

There are some funds that don't write this requirement into their legal docs, but it's something that a number of would-be investors always ask about (in my experience).  They want you as a fund manager to be incentivized to make good investments, because you are staking your own cash too.  And this makes sense.

3d) Sometimes you need to loan money to your fund.  

There have been several cases over the course of the last year, where either Eric or myself have had to loan Hustle Fund money interest-free to do a deal that needed to be done now (before we had the fund fully together).  

One thing that is different about raising money for a fund (vs a product-company) is that when investors sign their commitment, they don't actually send you the money right away.  So, let's say we raise $10m, we don't actually have the $10m sitting around in a bank account.  This surprises a lot of people -- VCs don't actually have cash on hand!  

The way investors invest in a fund is they sign a paper committing to invest in the fund.  And then later, when the fund needs money, the fund does a capital call.  Typically, capital calls are done over the course of 3 years.  So, if let's say an investor commits to investing $300k into a fund, then on average, that fund will call 1/3 of the money each year over the course of 3 years.  In this case, that would be roughly a $100k investment each year from this individual.  The capital calls are not done on a perfectly regular cadence, because sometimes a fund will need money sooner than later.  But most funds try as best as they can to do regular capital calls.

But, this also means that there's a lot of strategy and thinking that needs to go into capital calls.  For example, when you're first starting out to raise money and have very little money committed -- say $1m, it can be tempting to call 50% of the money right away to start investing $500k into a couple of deals.  However, as you continue to raise, subsequent investors, will be required to catch up to that 50% called amount.  And let's say you round up another $6m in capital, this means that all of a sudden you have $3m that you're automatically calling to catch up to the proportionate amount that the first set of investors contributed.  And if you're writing small checks out of your fund, much of that $3m will then just sit around in your bank account not earning interest and will negatively affect your rate of return.  So instead of doing a capital call, loaning your fund money is a way to ensure that you don't have capital just sitting around in your bank counting against your rate of return.  

There are bank loans you can get once you are fully closed and up and running, but very few banks will loan you money in the very beginning when you have raised nothing - hah.  

3e) And even if your fund does well, you still make very little money at the end of 10 years!

First, most VC funds are failures.  In fact, much like startups, I've heard that 9 in 10 VCs will not even get to 1x returns!  

But, if you happen to be in the lucky 10%, there's even a range here.  The "gold standard" for profitable VCs is a "3x return" benchmark.  If you're above it, you're considered excellent.  And this is very hard to do.  Just getting into the profitable category is an accomplishment in itself.  But, let's suppose for a moment that your fund is excellent (because we all believe that our funds are excellent). And let's say that we return 5x on our fund.  

On a $10m fund, a 5x fund return means the fund will return $50m.  Using a standard 20% carry formula, and after returning most of the gains to the fund's investors, it means that the team will receive $8m.  If you have 2 managing partners, that's $4m per person -- but 10 years later.  Considering that you'll make no salary for much of that time, there are many other professional / tech / established VC jobs at big Sand Hill firms that will make you more money or the same amount of money on salary alone (not including benefits or stock) with greater certainty.  You don't have to be a 90%+ performer as a Director of Product at Google to accomplish the same outcome as an exceptional micro VC manager.  Think about that -- you risk so much, much like a startup, but your upside is equivalent to working a steady job at Google for 10 years!  

For all of these reasons, this is why microfund managers who are able to raise more money on subsequent funds end up doing so, because for the same amount of work and risk, you'd much rather be paid more in salary and in carried interest later.

4) You should love fundraising.

I think most people think that as a VC you spend most of your time looking at deals.  The breakdown of a given week for me is something like:

50% fundraising-related (preparation of materials / meeting potential future investors / networking / etc)

20% marketing-related (content / speaking / etc)

5% ops (legal / audit / accounting / deal docs / etc)

15% looking at deals (talking w/ co-investors & referrers / emailing with founders / looking at decks / talking with founders)

10% working with portfolio companies

Of course, it varies a bit depending on if you're at the beginning of a raise or if you have closed your fund.  But, the point is, you will spend a solid chunk of your time as a micro VC on fundraising activities.  Even if your fund is closed and you don't have a deck to pitch, you are always in fundraise-mode.  

If you have never fundraised for anything before, you will probably think that this process is horrible.  Having raised money before for my startup and having coached a lot founders on fundraising over the last few years, I've grown to love it.  And part of that is just lots of practice -- the more you practice, the better you get, the more you like something.  

5) Fundraising for a micro vc is exactly like fundraising as a product-startup.  Except more involved.  

Prior to raising a fund, it never occurred to me where fund managers raise their funds.  That was just not something I had thought about before.  For the big Sand Hill VCs, most of them raise money from institutionals.  These are retirement / pension funds at goverment entities.  Or endowments at universities.  Etc.  But as you can imagine, these entities are pretty conservative.  And rightly so, the pension check that granny is counting on for her retirement shouldn't be frivalously thrown away on a fund that invests in virtual hippos recorded on some blockchain.  

So as a first time manager, often it can be difficult to convince these types of institutional funds to invest.  It can be done if you have a strong brand already.  But even if you are an experienced angel investor or worked at a well-known VC fund, you're still starting a new fund with a new brand, and there are still questions about whether you can repeat your past success on this new brand.  

This means that much like product-startups, you end up raising from individuals, family offices, and corporates primarily.  But much like with raising money from angels and corporates for a product-startup, angels and corporates don't have website announcing that they are funding vc funds.  You have to hunt for these folks.  Often these "angels" whom you can access are folks you know or folks who are 2-3 degrees away from you whom you don't know yet (see my post on raising from friends and family).  

And much like a product-startup, the check sizes are going to be smaller if they are from individuals (unless you know lots of very very wealthy individuals).  When we first started fund 1, our minimum check size was $25k -- much like the minimum investment amount for a typical product-startup.  Except that we were raising tens of millions of dollars not $1m.  So, $25k doesn't go far on say a $10m fund.  

This means you need to be doing lots of meetings.  And this takes time.  The average time for a microfund manager to raise a fund is ~2 years.  We felt fortunate and incredibly thankful to our investors to be able to raise our fund in < 1 year.  But, when you think about it, that's still months of actively fundraising.  (see point #4)

6) And you have a limited number of investors you can accept.

Per SEC rules, you can only accept 99 accredited investors into your fund.  This means that if you want to raise a $10m fund, you need the average check size to be above $100k.  

When product-startups set a minimum check size, it's usually arbitrary.  If you're raising $1m for your product-startup, it won't hurt you to take some investors at $1k or $5k checks here and there, especially if they are value-add.  With a fund, every slot counts.  

So when we started with $25k as a minimum check size for some friends, we knew we needed to quickly raise that bar in order to raise a significant enough fund and still maintain 99 investors.  We ended up having to turn away a lot of great value-add would-be investors who could not do a higher investment.  I would have absolutely loved to have brought in more investors if I didn't have this restriction.  

In other words, you cannot just accept $5k here and there from friends and claw your way to momentum.  

To get around this, some funds set up a “1b” fund.  E.g. Hustle Fund 1a and Hustle Fund 1b and split startup investments equally between the two.  That would be one way to get bring in more investors, but the costs of this setup start to go up, so we decided not to do this.  

7) Ok, so there's no money.  You also cannot change the world on fund 1.  

If you can get past all of the above, and you're still "yay yay yay -- I want a life of making no money and want to fundraise all day and night for whatever cause I am trying to support," the last piece is that you should know that you cannot change the world overnight.  

I know so many aspiring micro VCs who go into this, because they want to fund more women or minorities or geographies or some vertical that is underfunded.  And I think those are all awesome worthy causes.  And me too -- the reason I'm doing this is that I don't believe the early stage fundraising landscape is a meritocracy, and I want the future of funding to be much more about speed of execution rather than about what you look like or how you talk.  

But you absolutely need to go into this with a 20-30 year plan.  And the reason is that you're a small little microfund with say $5m, you won't be able to change the numbers in any of these demographics, because impact happens at the late stages when VCs pour tens of millions of dollars into companies -- not $100k here and there.  What does effect change is having lots of money under management.  And that happens by knocking fund 1 out of the park.  And then fund 2.  And then fund 3.  And growing your fund each step of the way.  And growing your believers who start to hop onboard your strategy -- not only your investor base but other VCs.  And that is a 20+ year plan.  

Moreover, you need to be contrarian to have a good fund.  But at the same time, you cannot be too contrarian either on fund 1, because you need to work with other VCs in the ecosystem.  You need your founders to get downstream capital.  So to a good extent, I do care a lot about what downstream investors think and how they think about things.  You can only start to be very contrarian once you have more money under management (i.e. have proven out the last couple of funds) and follow on into your companies yourself.  

So in short, you will not make any money on fund 1.  You might need to loan money to your fund.  You will need to have money to invest into your fund.  You will constantly be selling your fund as an awesome investment opportunity for this fund and the next fund and the fund after that, etc...  And you will not change the world on fund 1.  But, if you still love all of this and go in with eyes-wide-open on all of these things, and if you believe you want to do this for the next 20-30 years, then I would highly encourage you to go for it.  I think it is the best job in the world.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter.

[hippoland]

How to raise money from friends and family

Most VCs won't invest in startups super early.  There are some exceptions -- my company Hustle Fund tends to invest quite early, and so do a few of our peer funds at the pre-seed level.  But, there are only a handful of us, and 99%+ of startups won’t be able to raise money at this stage.  Alternatively, if you are a successful entrepreneur or have great connections, multi-stage VC funds will also invest super early in these types of founders.  

But for the vast majority of entrepreneurs, doing a friends and family round of funding during the earliest stages of a company is the primary way to raise money.  I know for many people, raising from friends and family doesn't come naturally.  Many entrepreneurs may feel like they don't know enough rich people to raise money from their network.  Many people -- would be investors -- you ask to invest may also feel like investing is only for the really rich.  It can also be confusing and awkward to ask people close to you to invest.  How do you even broach the topic?  Will the person be taken aback?  Will it ruin your relationship?

Here are some tactical tips from my personal experience that might be helpful:

1) Dedicate lots of time to fundraising.  

Fundraising, in general, takes a lot of time.  And, raising from friends and family is no different.  As I've written about previously, one of the biggest challenges in fundraising is that it just takes so much time to balance running a company and raising money.  

2) Set up "catch-up" meetings with friends and family.

It's really hard to know who will be interested in investing in your new venture.  Set up "catch-up" meetings with everyone who is smart, has means, and/or is well-connected.  In each of these meetings, you'll certainly "pitch" your new venture, but you are not necessarily looking to raise money from each of the people you meet with.  In some cases, you may only be looking to get introduced to more people who may be good to meet with.  

Pack these meetings into a limited period of time to maximize FOMO as well as maximize the efficiency of your fundraise.  

3) Be creative about your meetings.  

Your meetings could be coffee catch-ups.  But in other cases, maybe you cook brunch at your home and invite people over.  Or maybe you invite a lot of people over at the same time.  In other cases yet, you may want to do a group social activity -- it could even be bowling.  Whatever works for you and what you think your friends / friends-of-friends / family may like doing to make your meeting less formal.

Your meetings don't have to be stiff coffee meetings.  

4) You are always "pitching" even if not formally.

You should have a deck ready to show on your phone or computer but you don't always need to use it.  I find that at the earliest stages, people are mostly investing in you.  

Make sure that at some point in all your catch-up meetings you mention:

You are starting a new company

One line about why it will change the world -- think very high level here.  

That you are raising money for the company

That you are raising only from friends and family

Casually ask if he/she would like to invest or if he/she knows 1-2 people who might be interested in potentially investing or may know other potential investors

It is important to get each person you talk with very excited about your business.  I find that one of the biggest mistakes entrepreneurs make in pitching their high level ideas is that they say too much about what their product idea does.  E.g. "I'm starting a new social network that will combine Facebook, Snap, Instagram, WhatsApp, WeChat, and LINE all in one place."  or "I'm starting a new AirBnB for retired people."  This isn't very exciting.  The only person excited about your product mechanics is you.  BUT, you can get people excited about outcomes.  "E.g. I'm building a new social network that will bring people globally closer together -- so that people in India can talk with people from Japan."  or "I'm starting a new type of housing platform so that older people don't need to live in stodgy sad retirement homes and can live a vibrant independent life."

When pitching to people who do not invest for a living (i.e. non fund managers), it's important to explicitly mention that you are raising money and that you want their help.  This could mean that they could help introduce you to other people and/or that they could invest.  

There are a lot of people on the internet who say you should ask for advice and not money.  IMO, this is really awful advice.  Most people who do not invest for a living -- even active angels -- don't realize they are being asked to consider your idea as an investment if you don't ask for their help in raising money.  If you are talking with your dentist about your new startup, his/her first thought is not, "Oh I wonder if I can invest?" or even, "I would never invest in this."  His/her first thought will be, "Oh cool, John/Jane Doe has a new career.  I'm going to make a mental note that he/she has left Cisco and is now working for himself/herself."  They don't see themselves as investors, and so you need to explicitly make the ask if you want an investment.  You cannot just assume that people will volunteer to invest.

So your conversation might end up going something like this:

"So yeah, lots of new changes.  I left Cisco, and I'm now starting a company.  We are trying to do ABC in the world, and if we're successful, DEF will happen.  Right now I'm raising some money from friends and family to achieve XYZ goals.  I wanted to see if you might be interested in potentially investing or know 1-2 individuals who might be interested and good to talk with?"

(Please don't monologue.  But, those are the rough talking points that you need to bring up.)

At this point in the conversation, you are making the ask only to see if the person will consider investing.  (Or knows someone who might be good to talk with). You are not asking for a commitment.  

It is important to mention that you are raising money from friends and family.  A lot of people have in their heads that entrepreneurs raise money from funds and don't realize that at the earliest stages friends and family have the opportunity to invest in your company and also get the best deal.  This is what you need to educate would-be investors on.  

A lot of people also think that investors need to be super rich in order to invest.  This is also not true and also what you need to educate people on.  

When you are first starting to raise money, my personal strategy is to set a lower minimum check size and generate momentum.  This makes investing very accessible to many professionals.  I know lots of "angels" who invest $1k-$10k per deal.  I think many people think that angels need to put in at least $25k per deal, but that is simply not true anymore.  Now, you as an entrepreneur, may not want a lot of people to put in less than $25k, because it will mean you have to do a lot of meetings.  But when you are first starting out AND if you don’t have a strong investor network, it may be worthwhile to accept some smaller checks just to be able to get the flywheel going and also to be able to say Bob or Mary has invested in your company to generate buzz with subsequent conversations.  Once you start to get checks in the door, you may want to increase the minimum.  As a result, investing in startups is actually accessible to many people in your network.  They just don't think about it that way, and it's your job to change that mindset.

5) You are selling more than your company

At the earliest stages, people are investing in you.  There are other things you can do to sweeten the deal.  One of the things that we do at Hustle Fund is we do a meetup for all of our investors in our fund multiple times a year.  It's an opportunity for them to meet and get to know each other.  In general, well curated / exclusive networking events are a really good draw for people to participate in things (as I wrote about here as a tip for getting speakers for a conference).  People always want to get to know other rich and well-networked people.  If your initial minimum is say $10k, then not only is someone buying a stake in your company, but he/she could also potentially be buying into a network.  And you can facilitate this for free / cheap.  You can host these in an office space for free.  And pizza / wine / cheese / crackers are pretty cheap.  

People who invest in you -- especially friends and family -- are buying an experience.  They are not just buying a transaction.  Make that journey / experience a good one.  

6) Do a formal pitch & call-to-action if someone is interested

From the catch up meeting, if someone is interested in learning more, you can either dive into details right then and there (preferable if you all have the time) or set up another time to talk.  

This is where it's important to have a pitch deck / materials ready.  At the end of this pitch, try to push for a yes or a no.  In many cases, people will need to think about your deal, but, if the person you're speaking with is ready to commit, have a SAFE / convertible note ready to sign.  

7) Be transparent

Once an investor has committed but he/she hasn't invested in a startup before, it's important that you clearly outline the risks.  I would say something like this, "I am flattered that you are going to join our round.  And I think this is a great opportunity.  But I really want to emphasize that investing in a startup like this is an incredibly risky endeavor.  I could potentially lose all your money, and there is a high probability of failure."  People usually appreciate this level of transparency, and I've never known anyone to back out, but I think that it's important to highlight this in case/when things go awry down the road.  In fact, psychology suggests that in many cases, when things are slightly pulled away from you, you only want them more.  

8) Re-assure friends/family that it's ok not to invest

If you sense that someone feels awkward when you're asking for his/her help, it's important to re-assure him/her that it's ok not to participate.  You might find yourself in a dialogue like this:

"Oh...oh.  Well, I don't really have any money to invest." "A couple of thoughts -- 1) First off, I value our friendship/relationship above all else.  So, I don't want to put you in a tough position.  If this isn't a good fit, that is totally cool.  I just wanted to give you an opportunity that I think is great.  2) I also want to mention that since this is a friends/family round, we have a low-ish minimum of X.  I don't know if that changes things, but just wanted to highlight that."

It's really important for the sake of your relationship with the person to re-assure him/her that it's ok not to invest.  This is an opportunity you are presenting and that's it.  

9) Don't run out of leads

The best piece of advice that I received when I was raising money for Hustle Fund was from Charles Hudson, who also runs a pre-seed fund called Precursor.  He said, "Don't run out of leads."  This is very good advice -- if you have infinite leads (and time), you won't have to worry about being rejected as you go along, and that is exactly the mentality you should have going into and throughout your fundraise.  

When I was a first time entrepreneur years ago, I remember being incredibly afraid of rejection.  I didn't push people to a yes or a no for most of my raise.  By having the attitude that you have infinite leads, then you will force all potential investors you're talking to into a "yes" or "no" answer.  And this is a good thing.  A “no” means you can stop wasting your time with someone who isn’t going to commit.  

But it also means that you need to keep generating leads to have enough potential investors fill your round.  And as you go along, this gets harder, because you'll start with people in your network who are closest to you first and then you’ll work outwards and chat with people who may be friends of friends of friends who don't know you at all.  This is why it's so important to constantly ask everyone you talk with for 1-2 names / intros of folks they would recommend talking with...because you can't run out of leads.  

Now another typical piece of advice that you often hear is, "Never take an intro from someone who doesn't invest."  I would say this is true of VCs.  This is NOT true of non-professional investors -- angels / friends / family.  VCs have funds to invest out of, and it’s their job to invest money.  If they pass, then there is something that they didn't like about your business, and that's a negative signal.  If I were running a startup, I would not take an intro from a VC who passed.  But angels are different.  They don't necessarily have pools of money that they need to invest.  If an angel passes, it could be because he/she wants to set aside money to repair the roof on his/her house.  Or save some extra money for his/her kid's private school.  Or take a fancy vacation.  Or buy a new car.  Angels can do whatever they want with their money, including not invest.  So, if an angel passes, that isn't a knock on your business per se, and most people understand that.  Also, angels run out of money all the time -- they may have been active before, but until that portfolio becomes liquid, then an angel may be tapped out of funds even if he/she wants to invest in your business.  So, definitely ask for intros to other potential investors from individuals.  

I usually try to ask for 1-2 introductions, because it's a small but anchored ask.  If the ask is too broad such as, "If you can think of anyone who might like to invest...", then no one will think deeply about it.  "Can you think of 1 person who might be interested in taking a look at this?"  Asking for just 1-2 leads is a small task, and almost everyone can think of one specific person he/she knows who may be interested in chatting with you.  

Pulling together a friends and family round is a bit of a crapshoot and takes a long time.  Part of the challenge is in identifying which people are interested in investing in you and has some money to do so.  But, I've found that it's hard to predict who will end up joining your round.  The richest people are not necessarily the most bought into the opportunity nor are they necessarily investing a lot into startups.  In fact, many super rich people are a bit risk-averse, because they want to preserve their wealth.  Conversely, many people whom you may discount as not having much money may actually be really bought in, and in fact, I’ve found that people who are not super rich tend to also be more risk-taking, because they want to become super rich.  So, in the end, you’ll just need to meet with a ton of people.  And, you'll need to do a lot of meetings, but raising a friends and family round even if you’re not well-connected can be done.

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter.

[hippoland]

Why I invest outside the Silicon Valley

I grew up here in the Bay Area during the dot com boom.  I went to college during the bust.  And when I graduated, it was booming again.  From that perspective, things have been mostly rosy in the Silicon Valley for startups! (except for 2008-2009, which is another story)

But, I think we're in trouble, Silicon Valley.  I think we are *on our way down* as an early stage startup hub unless we start to fix some of our problems around here.

These days, although my VC fund Hustle Fund is based in the San Francisco Bay Area, I actively seek to invest in startups outside the Bay Area.  (To be clear, we do invest in companies here opportunistically but we do not actively scout here.)

1) Silicon Valley / San Francisco is too expensive

With the high cost of living in the San Francisco Bay Area these days, a lot startup capital must now go towards founders’ rent.  In fact, people here qualify for low income housing if they have a household income of $117k!  This is absolutely insane.  This takes capital away from investing in companies themselves.    

At this cost-of-living level, the Bay Area is no longer affordable to many founders who are not already rich.  As much as people love the $8 avocado toast and the sunny weather around here, these are all less attractive when you're crammed into a small room with 9 other people on bunk beds in a small apartment.  

So, given the choice -- just purely based on economics -- of whether to start a company in the Bay Area vs say Austin, Austin makes a lot more sense.  This is a no brainer.  

2) Other startup hubs are on their way up

Now, other places like Austin have always been cheaper than the SF Bay Area.  But, previously the cost-of-living delta was not as great as it is today.  In addition, not only is the Bay Area becoming prohibitively expensive, other cities are becoming more attractive as startup ecosystem.  This makes the decision to start a company in the Bay Area even less compelling when there are equally attractive options elsewhere.

In fact, my favorite place to scout for startups is in Toronto/Waterloo.  Not only are the people there nice as all hell (and the dollar exchange rate works in my favor), but there is incredible talent in Toronto/Waterloo.  This is because large tech companies have established serious offices there -- Google / Facebook et al.  But additionally, startups in this ecosystem have now grown large -- Shopify is TO's poster child unicorn, and the experience that tech workers get at a growth startup is good fodder for the next generation of startups.  (I know everyone in Ottawa is going to be mad at me for calling Shopify a TO startup, but to be fair, there are massive numbers of Shopify employees / former employees in TO.).  Other cities that I like are LA (basically my backyard), Boston (oldie but goodie), and ATL.  I need to spend more time in Denver/Boulder, Salt Lake City, and Austin.  I also look at the "pan-midwest": Chicago, Cincy, Indy, et al.  

This rise of "other startup hubs" will only continue to trend upwards as today’s startups become large and talent from those companies eventually find their way to new startups.  This will make it harder for SF to compete for startup founder talent.  

I would say, though, today, the SF Bay Area is still on top for growing a company at the late stages.  It still has the most experienced talent for this stage, because there have been a lot of high-growth companies that have been successfully built here.  And those people all learn from each other.  In addition, a lot of the multi-stage tech VCs are also still here.  It might be doable to raise an angel / micro-seed round locally outside the Bay Area, but for the late stages, there's still much more capital being invested in companies here.  Lastly, M&A is also still big here -- the tech companies who are doing big acquisitions are in the Bay Area (though this is changing too).  

3) So, where should you start a company today?

At this point in time in 2018, I think what makes the most sense is for a startup to start where he/she wants to be.  Just personally, where do you want to live?  And use free content from the internet to learn new skills and focus on growing your business.  And if your company ends up getting to a certain growth stage, then it makes sense to open an office in the SF Bay Area.  This is probably just after the series A in my opinion -- where you're doing perhaps $300k-$1m per month in revenue.  

Many startups these days are using a distributed model successfully.  This can work depending on the type of culture you want to set for your company.  Do your employees like to socialize with each other?  Or do they like to just focus on their work and socialize outside the office?  Are your employees good at written communications?  Documentation?  Companies like Automattic, for example, have established a truly distributed work model, but this works, because that is part of the culture and important to the people who work there.  In some sense, this is also tied to your business model.  If you have a heavy sales model, for example, having a whole team of remote sales folks probably doesn’t make sense.  You need camaraderie and in-person energy.  

Or a hub and spoke model, where there are small offices in a few places so that people can still socialize with their co-workers but then are tied back to the mothership in San Francisco.  Intercom and Talkdesk, which both have European founders have HQs in San Francisco but also significant offices in Ireland and Portugal.  I think models like these are the wave of the future regardless of whether there’s an international tie or not.  

4) But, VCs don't get it

Unfortunately, many VCs, ironically, are the greatest laggards of new trends.  Many VCs will still only invest in their backyard, because they believe they have to meet people in person even though video conferencing solutions like Zoom are really good these days!  And many VCs are also averse to new ways of working -- remote working etc, even though the costs at the early stages work out way better for companies like these.  So this is a risk -- you might not be able to raise money from some VCs if you have an “unusual” work model.  

5) What the future holds

I think that an increasing global trend is that a number of cities will (and already are) emerging as startup hubs.  And, I think that the good news is that entrepreneurs can now start a company from almost anywhere.  And in the long run (20+ years from now), even at the late stages, we will see new funds that will invest outside the Valley and new multi-stage funds popping up outside the Valley to invest in growth stages outside the Bay Area.  And, if the SF Bay Area cannot get its act together on lowering or maintaining the current cost-of-living, my prediction is that the SF Bay Area will RIP as a startup ecosystem (except for rich entrepreneurs) altogether.  

I hope that doesn't happen.  But that trajectory is on its way.  And that is why I invest outside the SF Bay Area.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter.

[hippoland]

How an event led to multimillions of dollars in product revenue

Last Friday, I attended the 5th Hustle Con.  I could not be more proud of The Hustle team.  It was the best Hustle Con to date in my opinion.  And perhaps even the best event I’ve ever attended. 

The Hustle, the company that runs Hustle Con, is a fast growing media company that serves up tech news in an edgy way.  Today, they have around 1m subscribers, is doing multimillions in revenue per year, and has 20 employees.  But it all started with just one event.  Here are my learnings about events from the last 5 years:    

1) A simple event with simple value-proposition can lead to a scalable company

The Hustle is best known for its avant-garde daily newsletter.  But in the beginning, they started out with just one event called Hustle Con that happened just once a year.  The premise/mission for Hustle Con was to provide tactical company-building advice for non-technical founders.  That first event in 2013 was held at Intuit, and just < 200 attendees paid between $100-$200 per ticket.   

Photo credit: Lesley Grossblatt

Compared to the 2500 people -- both technical and non-technical -- who come from all over the globe to attend Hustle Con today, the look-and-feel back then was janky as all hell.  But the value has remained the same every year -- you will learn at least one tactical thing from each talk to help you with your business.   

Photo credit: Eric Bahn

Early adopters can easily overlook bugs and janky-ness as long as you are providing a clear, differentiated value proposition.  Even in that first year, Hustle Con delivered on that. 

2) Events are easy to get feedback on

We know the first Hustle Con went well because of the concrete feedback that came back from the attendees.  At the first event, all the attendees were asked to fill out their feedback right then and there on index cards at the close of the event.  

The #1 thing that people thought could be improved was to allocate more time for bathroom breaks.  People were so engaged with the content, they felt they could not leave the room.  

It is from this feedback that you can build upon your value proposition online beyond the event.  

3) People pay to be in your audience when they attend events

The interesting thing about events is that they are a good way to jumpstart your audience for a new product.  And in fact, people will pay you to be a part of your audience that you can later market other products / services to.

This is unlike any other marketing channel where you, as the company, need to pay to get potential users.  

4) People will help you with your event for free

There is no other marketing channel where people will help promote your company for free.  In fact, volunteers often make all the difference in running an event, and for a good event, volunteers sign up in droves, because they want to attend for free.

5) Being an event organizer allows you to meet influential people

Organizing events is one of the best ways to meet influential people.  People loved to be asked to speak at conferences -- no matter how famous they are.  And, if you can get your speakers in front of a high quality audience, it makes them feel extra special.  This is one of the easiest ways to meet influential people!  As it would turn out, The Hustle ended up raising their first angel money from many Hustle Con speakers.  

Entrepreneurs work so hard to try to network with investors and potential customers.  And it’s hard to get attention in this way.  But, run an event.  It’s one of the best hacks ever.  Even if an investor or potential investor isn’t able to attend, chances are, he/she will respond to you to decline.  And, that response opens the door for you to get to know him/her.  

6) Influential people like meeting other influential people

For that first event, you’ll have nothing to offer your influential speakers.  Why should they speak at your event?  You probably won’t be able to get that many attendees.  And, that first event may have a lot of bugs / flaws.  But speakers like networking too.  So that’s a big tactic that many events use to try to draw in influential people to speak.  

At Hustle Con, for example, they hold a speaker dinner, which happens the night before the event.  This dinner is invite-only, and they invite all the speakers to have dinner together as well as other people they think the speakers would like to meet.  Most large events do similar “VIP dinners” as well.  

So, one tactic I’ve used over and over again to get people to speak at various events is to name drop other people who have already committed to speaking.  Landing that first speaker (usually from within network or close to network) is critical, because all your other speakers will come as a result of that first person being there.  

7) You have to get creative when cold-emailing 

Warm introductions, are of course, great if you have them.  But, at some point, cold-emailing is necessary in order to get star speakers.  Sam Parr, the CEO of The Hustle, used a great cold-email to get speakers in the early days of Hustle Con. 

And even included personalized gifs like this: 

Gif credit: Sam Parr

8) Engage your list and build off of it

After an event, you have a captive audience (assuming you pulled it off well).  You need to engage your list of attendees immediately (make sure you have the proper permission from them to do so).  If you are doing an event to get people to do customer development with, you need to stay top-of-mind.  Don’t let your list sit around and become obsolete. 

One strategy is to put everyone in a FB group and have them ask each other questions.  Another strategy is to create a relevant news digest to send to your list.  

9) Culture is set at that first event

What I didn’t realize 5 years ago is that the culture and tone of The Hustle would be heavily influenced by that first event.  In that first event, there was gender balance amongst the speakers -- 4 women and 4 men.  And even in the audience, there was a fair percentage of female attendees.  As part of the culture of that first event, there was also a “no asshole” rule.  

At the 5th Hustle Con on Friday, I noticed that there was near parity on gender balance (the ticket purchases show 55% men and 45% women).  The attendee makeup was fairly racially diverse as well.  And attendees came from everywhere globally and held just about every job occupation (though primarily from tech).  

Most importantly, the ethos of Hustle Con has always been about sharing -- sharing information and genuinely trying to be helpful.  And even though the conference now has thousands of attendees, that ethos is still there.  I learned so much about various fields from other attendees.  Unlike at other tech conferences where I often feel like people are trying to size each other up, or talk about how they are killing it with their startup, at Hustle Con, people just want to share knowledge and learn from each other.  This may sound cheesy, but every year, when I walk around the venue of Hustle Con, I get this feeling of happiness -- a feeling of “this is how the world should be”.    

Setting a tone for culture is a lot easier at an event than online, and you can carry this audience and ethos over to your online product afterwards.  

10) Events are overlooked

Events are overlooked.  I’m not suggesting you necessarily run an events business (though those are lucrative bootstrapped businesses in themselves).  But, I rarely see startups doing events as a way of customer acquisition to jumpstart a new product or a new company.  

If I were to start a company today, I would start by amassing an audience by running an event.  It could be a small event.  Maybe 1-3 hours -- like a meetup.  It could be held at a corporate office as the venue for free.  And have that audience pay to attend and then follow up afterwards with each person individually to do customer development.  And then I would build out a product and would continue holding these events to amass a larger audience and eventually start to sell to all of these people as my first customers.  

Events allow you as an entrepreneur to really convey who you, as a person, are.  And, this ultimately is how you gain followers for your brand -- your company in the beginning is less about your product and more about you.  Your potential customers want to support you because of you, and this is a lot easier to convey in person with that first group of early adopters.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter.

[hippoland]

What problems I want to fund and solve?

People often ask me what startups I want to fund.  I hesitate to write this list, because I've found there's actually very little correlation between areas that I would love to fund and what I end up funding.  This is because beyond business ideas, there are so many factors that make a great business.

For example, in 2018, I've championed and completed 7 deals at Hustle Fund.  Coming into 2018, because I was/am seeing so many blockchain and health companies, I thought I would fund mostly blockchain and health companies.  But, I have done 0 health deals in 2018 (I did 3 in 2017).  And, I have done 2 blockchain deals.  In other words, the majority of the deals that I have done this year are not in either category.  

That being said, these are the areas / problems that I'm interested in funding, all other considerations aside:

Health:

Our medical system is a huge f***ing mess.  I am looking to fund ideas that will make big changes here.  In particular:

Health Insurance: health insurance is the biggest scam ever.  Because health insurance is tied to your employer (which makes no sense from a societal perspective), you as the consumer, are at the mercy for what your company thinks is best for you.  As a result, you don't actually get to vote with your dollars which doctor you choose or which services you want done.  This means you will over-visit the doctor and clog up our medical system if your employer gives you a low deductible plan.  (And rightly so -- from an economics perspective, you should take advantage of this). It also means that you will be tied to horrible health care providers if your employer bought a cheap plan with a limited network.  

So, let's change this up.  I'm most interested in funding completely new health insurance models that give power back to the consumer.  Things like health savings accounts -- you get to decide whether you would prefer to keep your cash as an investment or go see the doctor.  I like the general direction that Lively seems to be going in.  Or direct primary care plans -- you should be able to decide which service providers to pay for, and they should be on the hook for drumming up their own business and serving patients well.  You also shouldn't have to get a referral from another doctor to be able to see a specialist weeks later for an issue that needs to be addressed today.  Money or credits of some type should allow you to prioritize your situation when you're in a bind.  But these days, it seems that connections to doctors are more important than anything else.  

Providers: we have a shortage of internal medicine physicians and nurses in this country.  On one hand, it's great that we have a lot of certifications to enable our medical professionals to be properly trained, but if I'm going to be forthright, the medical system is really just a cartel.  We need to increase the number of people who have some basic medical knowledge to help alleviate the strains of our bogged-down medical system.  I'm interested in ideas that take advantage of geography -- can you see a doctor today who is in the midwest somewhere (virtually) or even overseas somewhere, where there are more medical professionals?  We are starting to see some doctors who are licensed to practice in California live abroad in Bali and partake in telemedicine -- can we do more of this to help with patient loads from state to state and perhaps get more doctors certified in multiple states?  Or perhaps it's a tech-enabled service in itself -- I like the direction that Carbon Health appears to be going in.  

Costs: I've seen a lot of startups attempt to reduce medical costs.  90% of medical costs are attributed to about 10% of patients.  So, even though in the US, our medical costs have really ballooned, I'm actually less concerned about optimizing the costs of the remaining 90%.  There are all kinds of startups trying to address different ways to track the sick and the elderly and encourage preventative measures and reduce costs.  But it's a hard problem to solve, and I'm still looking to make a bet here, because I haven’t quite found a solution that I’m bought into that I think will really solve this problem.  

As a sub-category of health, I'm also really interested in startups changing women's health.  I think we still have a long way to go when it comes to contraception / fertility / postpartum care.  

This an area that I'm incredibly bullish on and yet at the same time find really difficult to fund, because often solutions in these space require hardware / new devices / FDA approval (all areas that I tend to shy away from as a small fund).  But there are a few trends that I think fit into this space.  Women are delaying having children, which means that we as a society need to embrace new forms of contraception (not sure this is something software can solve) to improve reliability, usage, and side effects.  One of our portfolio companies called The Pill Club, for example, sends women birth control right to their doors.  

The flip side is that we are now also seeing a number of women go through IVF.  I think we are in the first inning of what this looks like, and again, I'm doubtful that software can solve this actual problem.  But, I can see how there may be opportunities to use software to increase the chances of success of IVF -- perhaps through better data analysis -- or help women receive the care they need through telemedicine and consultation.

On the post-child front, there are a lot of women-specific issues.  Postpartum care and depression, as a result of having a child, is a real and is a serious problem.  A postpartum care platform called Mahmee is tackling this by using software to help new moms get the support they need online from professionals.  

Childcare:

Speaking of children, childcare is a topic in itself that affects all parents -- not just moms.  Childcare is expensive.  One thing I noticed in living in an area with a high cost of living is that your expenses go up dramatically once you have a child.  Even if you're not sending your infant to the "Harvard of daycare", your monthly expenses for 2 children under 5 years old can easily be an extra $3000 per month if not a lot higher!  On the other hand, the people who need to send their children to daycare the most are people who need to work and can't afford to stay at home.  So it's a bit of a catch 22.  

I'm interested in exploring very different childcare models.  For example -- some wild ideas:

Daycares are a supply and demand issue -- in higher cost areas,

-Is it possible to load your toddler up on a bus and bus your kid out to a daycare 2 hours away where the facilities and cost to run them are a lot cheaper?  I'm sure this is fraught with all kinds of problems including obtaining necessary licenses, and heaven forbid what would happen if said bus got into an acceident.  But, it's an interesting question to explore, because in the coming years, I expect transportation to get cheaper / reliable (more safe) / autonomous or semi-autonomous.

-Is there a way to increase the use of home daycares?  Why are many parents reluctant to use home daycares?  Because of potential negligence of the sole-provider of home daycares?  Is there a way to add video technology to add checks and balances to make sure that your kid is being cared for?

-Is there a way for employers to provide loans for early childcare?  I.e. for 4-5 years, parents in high cost areas shell out $10k-$40k per year just on childcare per child.  And then at kindergarten, public schools are basically free for the next 13 years.  Is there a way to spread this cost of say $40k-$200k across time while simultaneously improving employee retention?  

I'm not sure if these ideas are any good, but I think childcare or the way to fund childcare can be completely reimagined.  

Work:

The workplace is changing a LOT.  In particular, I'm most interested in funding ideas that further entrepreneurship and being entrepreneurial.  These days, everyone is an entrepreneur.  Whether you are starting a mom and pop business or a tech startup or are getting into freelancing / consulting or are joining the gig economy, you are an entrepreneur even if you never thought of yourself as one.  When I was a child, being an entrepreneur was basically limited to tech startups and restaurants and salons.  These days, you see doctors and lawyers doing virtual consultations and living in Bali.  You see students, immigrants -- everyone really -- driving cars, returning scooters, and renting out their homes to make some extra money.  You see stay-at-home moms making crafts to sell on Etsy and Shopify.  

With Hustle Fund, this year, I've backed a banking service for freelancers called Every Financial.  And I've backed a back ops platform for freelancers called Hyke.  I'm very interested in this category overall -- whether it's new ways to make money or tools to help support new entrepreneurs, this is a category I'm bullish on as a whole that is only growing.

Education:

Education is an area that is so incredibly important but is often a very tough to make money in.  I'm most interested in ideas that can enable students / graduates to make a livelihood.  

For example, people are changing jobs more than ever and need the skills to do this.  I'm interested in new forms of education that will help people get the skills that they need to switch careers faster.  For example, we have backed Kenzie Academy, which helps teach people to become developers in cities where this education is traditionally not available.  But, I don't think everyone needs to become a developer.  There are lots of jobs that could use more skilled people.  Can you use VR to teach new skills that require your hands?  Is there a way to teach people sales online?  

At younger ages, I think that there are opportunities here as well to both teach and offer compensation.  In the old days, we had apprenticeship models.  Could the replacement for colleges and universities look more like an apprenticeship?  Instead of spending $500k on college, can you break-even for your education by working while learning?  For example, as a business major, can you take classes on lead generation?  Outbound sales?  And also some theoretical ones on game theory and pricing?  And can you intern at Salesforce to pay for your education in a co-op fashion during the year?  Minerva is doing some incredibly interesting things here, and what is amazing to me is that in just a short period of time, high school students are clamoring to go to Minerva.  They rank up there with the Ivy Leagues et al.  And I think there can many more schools that can be established with a differentiated approach to drive the cost of education down for young people.  

At an even younger age, can you do the same thing for high school summer programs?  

Education in this country is broken, but I think we can start approaching this by providing better programs that center around livelihood and job placement.  

Housing and commuting:

Housing is an issue that is near and dear to my heart.  In the San Francisco Bay Area, we have a massive problem with housing.  We don't have enough housing supply.  And, we have terrible restrictions in many places in California that prevent us from building up -- this is why you don't see skyscraper apartment buildings around here unlike in NYC.  This means that people's commutes around here are really long -- in some cases, people commute 2-3 hours from outside the Bay Area each way to work here.  And rents are astronomical.  This isn't sustainable.  I really don't know the right way to approach this, but this is a problem I think about a lot.  

Decentralized and verified data:

We are funding a lot of blockchain companies attacking many different problems.  Here are a couple of broader trends that I'm a big fan of.  

1) Decentralized data / crowdsourcing of data / verification of data -- this has mass implications everywhere.  Tracking people (refugees / drug addicts / professional credentials / etc) in order to better help them.  Tracking objects (validating scarcity / validation of the creator / verification of ownership).  Tracking information of the crowds.  

For us as a fund, the tricky thing about this category is that the business model is a bit rough / not straightforward.  But, I'm seeing interesting business models, where companies insert themselves in transactions (that involve validating things or providing services).  The scope can also be tough -- i.e. does your business need to aggregate massive amounts of data in order to be useful to other people?  

2) Decentralized Marketplaces -- I've written a whole blog post about this here.  Basically, this makes sense where there's a dumb middle(wo)man who takes a massive cut for doing little to no work.  Or there are payment transactions that involve lots of fees today because there are cross border / cross currency payments but using cryptocurrency, this can all be avoided.

3) Tools and protocols -- blockchain is in the first inning of this baseball game.  There are a lot of tools / platforms / protocols that need to be built to make it easier for developers and startups to build companies.  Much like how in the 90s, a startup would need $5m just to get a server going in a closet, blockchain also is in that same era.  I am interested in funding tools / protocols to make development and spin-up of new blockchain companies easier.  

These are some of the problems / opportunities I've been thinking about lately.  But, A) they could turn out to be horrible businesses since I haven't done the customer development on any of these and B) as I mentioned before, the vast majority of companies I fund are not necessarily chasing any of these opportunities.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter.

[hippoland]

Are you an investment or an option?

Early stage fundraising is an interesting beast, because there are all kinds of reasons why VCs invest at this stage.

Some background: 

There are essentially two camps of investors: A) those with a concentrated portfolio and B) those with a large, diverse portfolio.

Diversified portfolios:

Funds like YC, 500 Startups, and Techstars, etc all have diverse portfolio strategies.  They invest in lots of companies.  Say on 100 companies in a given portfolio, there may be a lot of losses, but a portfolio of this size only needs couple of outsized winners to not only make up for the losses but also return great multiples for the overall fund.  Because downside risk is mitigated by investing in a lot of companies, funds that utilize diverse portfolio strategies often have consistent results fund after fund -- there isn’t as much variation across funds as you might see with a concentrated portfolio.  

Concentrated portfolios:

Funds like Sequoia, A16Z, Benchmark, etc all have concentrated portfolio strategies.  The invest in few companies, so there’s little room for error.  Of course, any outsized winners will make the overall fund really really fantastic, because there are not that many losses to compensate for.  These funds tend to have high variability across the industry.  Certainly there are top tier funds who are able to consistently return solid multiples fund after fund, but there are also many many more funds who can’t even return 1x, because the variability in this model is very high.  In other words, this model, compared to the diversified portfolio model is much higher risk and higher reward (for better or worse).  

A couple of thoughts:

1) Some funds invest early to capture more ownership.  Others want to buy an option. 

This is a point I didn’t fully understand until I became an investor.  Because large Sand Hill VCs largely make their money on a concentrated portfolio strategy, they need to really really have strong confidence that their investments are going to work out.  

By the time startups get to the series B level, it’s fairly clear whether a business is working and printing money.  Hot companies are highly sought after.  It’s very competitive to try to win a hot series B deal, because every investor is chasing the same company.  As a result, there are a lot of large funds that will essentially buy a much smaller option at the series A level to be able to get potential access to a hot series B deal.  If some of those series A deals don’t turn out to be excellent businesses, then it’s just a small amount of money relative to the fund that didn’t work out.  But, if there is a hot deal in that group of series A deals, then it provides access to pour in tons of money and make a lot of money at the series B level.  Funds that make their money on later stage deals and who only invest at the earlier stages to buy an option don’t care so much about valuation.  They are only trying to buy a seat at the table to invest a lot in your company later when it’s clear you’re a winner -- they are not trying to buy any ownership now.  

In the past couple of years, series B deals became way too hot and competitive.  So a number of big funds have come down to invest at the series A to increase their optionality on capturing winners at the series B level.  Now that seed and series A are starting to bleed together, you are now seeing some large Sand Hill VCs do seed deals again.  

In contrast, microfunds (small funds) largely only invest at the earliest stages (seed stages) because their money only goes far at these stages.  For most of these folks, they are trying to capture as much ownership at the earliest levels, because they do not have more capital to invest at the later stages.  

2) In general, microfunds are more valuation sensitive than bigger funds

As a result, because microfunds are trying to capture most of their ownership in a company at the earliest stages, they are going to be much more valuation sensitive than a fund that is just trying to buy an option to invest in you in later rounds.  I’ve noticed that this can be a difference of as much as 2-3x on valuation caps!

In general, funds that do fewer (or no) follow on checks will be more valuation sensitive, because they really only have one or two chances to buy as much of your company as possible.  

Obviously, from an entrepreneur’s perspective, valuation is an important consideration, but it’s not the only one.  Even though larger funds will tend to be willing to invest at higher valuations, there is also more signaling risk that comes with an investment that is perceived as an option-investment.  I.e. if a fund invests in your company, and they typically make their money on series B rounds, and they don’t invest in your series B round, then many investors will wonder what is wrong w/ the company.  In contrast, no one cares if a small microfund doesn’t follow on, because they don’t have the capital to do so and are not known for doing so. 

So hopefully this provides some context as to how investors of big and small funds are thinking about your valuation.  But ultimately, in the end, valuation is really a matter of supply and demand as I’ve written about before.  And if no one is demanding your round, then it’s a moot point.  And if everyone wants in, no matter how valuation-sensitive the microfund, they may get swept up in clamoring to invest in your round.   

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter. 

[hippoland]

Seed rounds are dead

This is my second post (albeit later than I’d hoped!) on the state of Q2 2018 seed-stage fundraising.  The first one focused on crypto is here.  (although it's changed even more since I last wrote, as altcoins are starting to moon again, and I’m sure everyone will leave Consensus this week on a high.)

Here’s what’s happening in the equity world (from my perspective): 

1) Token sales in the crypto-world do affect "equity" raises.

(I put "equity" in quotes because I include convertible notes and convertible securities in this category.)

Part of this is driven by the fact that VCs who can buy into tokens for a while were spending a lot of time looking at token deals, removing some investors from the “equity market”.  

2) As blockchain companies are moving back to the equity world to do their pre-seed fundraises, this has shifted investor attention back into the equity world.

A number of companies that would have done a token sale a few months ago are now doing equity rounds instead.  Part of this is driven by how the SEC is thinking about regulations in this space.  Part of this is driven by the traction bar rising amongst blockchain companies -- the bar is now higher in order to do a large token sale.  I.e. Last year you didn’t really need anything to do a token sale and this year you do!  (wow, what a concept...) 

So, now that there are more companies flooding the equity market (via all these blockchain ideas), this means there is increased competition for startups seeking investor-dollars in the traditional equity world.  This leads me to point #3.

3) The bar for raising a seed round is increasing and so is the bar for raising a pre-seed round.

I allude to this here.  And Charles Hudson did as well here.  Because the gap between pre-seed and seed levels is increasing, there are a couple of approaches to this.  For some funds, it makes more sense to come in at the same entry point but they need to be willing to carry their companies longer (i.e. inject more capital into the company) before their companies get to the next stage.  This is both greater risk and reward -- pre-seed funds can gain more ownership in companies by putting more money into the businesses at lower valuations.  

For other funds, it might mean waiting until there are more investors who are interested in the opportunity.  And for others yet, it might mean waiting longer for results / traction.  

For us, we are not increasing our check size to carry our companies, so effectively, when we do bet very early as first check in, we are now investing at lower valuations.  This is because there is increased risk that these companies will not make it to the next stage, so the price is affected accordingly.  In other cases, if companies are looking for the pre-seed valuations of last year, then in those cases we're often investing alongside investors or they're further along.  In other words, we are not changing our strategy to accommodate changes in the market, but price is reflected in these deals.  

Caveat: this is different for blockchain companies.  As these start to enter the equity market, there are a lot of investors who will fund these companies at a very early stage -- even seed investors who typically don't do other pre-seed deals will bet here.  This is great for blockchain entrepreneurs.  So we see higher valuations in this space.  That being said, because there is also a LOT of competition amongst blockchain companies now, we are also passing a lot too.  So while we are open to paying up a bit, we won’t pay up as much as other investors.  

Just in general, given how cheap it is to start a company and how few pre-seed investors there are, I think it makes sense to bootstrap to some level of revenue traction before fundraising.  At least this is what I would do if I were starting a product-company today.  

4) Seed rounds are dead

These days, pre-seed, seed, and post-seed stages all honestly kind of blend together.  While each has different traction “requirements”, investors will often invest in multiple stages of these.  And, even though many people say the post-seed round is the old A, the interesting thing is that these rounds are not being done by series A investors.  Series A investors are still doing series A rounds even if they are a lot larger rounds that require more traction now.  Post-seed rounds are being done by seed investors.  

This is interesting because it means that "seed" investors will look at a broader stage than they used to.  In fact, Hunter Walk wrote about this greater seed stage here.  

In looking at this phenomenon, though, seed rounds are dead (in most cases).  

Certainly, if you raise early stage money from a large fund, then you've pulled together a round then, yes, that is a round.  But, the vast majority of startups these days will not be able to raise money from large seed funds who lead.  (And that’s ok!)  Most companies these days will be doing party rounds with some permutation of angels / friends & family / and microfunds and at multiple times.

Because most startups will end up raising tranches of money from multiple parties, many startups will use convertible securities (SAFEs / KISSes) or  convertible notes.  And often, these tranches here and there are done at different valuation caps.  E.g. $200k on $3m.  And then you make some progress and raise another $400k on $5m.  Etc.  So effectively, there's no such thing as a "round" anymore.  These are seed tranches.  

Now, a lot of big funds will tell you not to do tranches.  And the truth is that spending a lot of time trying to raise bits of money here and there is not ideal and takes a lot of time.  But frankly speaking, sometimes you have no choice and are not able to raise a big chunk all at once.  And that’s life!  And the best entrepreneurs will try every avenue for fundraising -- big funds, small funds, angels, friends & family -- and will roll with their best options and will keep making progress until they either don’t need investors anymore OR they are able to raise a big round once they’ve proven out the business.  And sometimes the most value-add investors are only able to write small checks.  There are a bunch of angels and microfunds I really respect and would take money from any day even though they are only writing small checks.  

So being able to raise in tranches is actually a good option to have because it gives entrepreneurs more flexibility in how they raise.  Gone are the days where you need to sit around for a lead to decide in 2 months if they want to put $500k into your company.  In many cases if you raise $100k here and there, it may even be faster for you to raise $500k from smaller parties on convertible notes / securities than to wait around for a large fund (depending on the fund).  Tranches also create a forcing function for investors -- if you only have $200k available at $3m, then that makes an investor move faster vs raising a $1m round at $5m when you're just starting your raise.  

So to me, it's a good thing for entrepreneurs that seed rounds are dead.

There are also a bunch of investors who will push back on raising in tranches saying, "yeah, but entrepreneurs end up giving away a lot of their cap table because they don't know how much they are actually being diluted down with their various SAFES and notes". I've heard this argument many times from friends of mine at big firms.  But frankly speaking, whether you're raising in tranches or not, you should ALWAYS know what you are signing before you sign (valuation aside, there are many other terms you should be aware of).  You should always know what percentage of your company you're selling to investors.  Take the time to do the calculations or find someone who can help you with this.  This is not rocket science, and being unable to use a spreadsheet (or find someone to use a spreadsheet) is a poor argument for why someone should not raise in tranches.  

I think this increased optionality for entrepreneurs is always a good thing.

RIP seed rounds.

5) Crowdfunding is starting to take off

This is less of a Q2 observation but more of a 2018 observation.

A question I often get is whether crowdfunding is looked down upon by VCs at later stages.  In general, from what I’ve seen, no.  I've backed a handful of startups who have done crowdfunding before us, and they've gotten funding later from well known VCs.  Building on my overall point in #4, your job as a CEO is to keep the lights on however you can.  And if it means that you're going to raise money from crowdfunding, then that's great.  

Crowdfunding especially works well if you have a consumer product and you have built up an audience who loves you.  When you think about it, this is the best form of funding -- taking money from customers both as customers and investors.  I've seen some of our companies raise a few hundred thousand dollars from their customers in just 2 days.  So, crowdfunding is legit and can move big money and also be valuable in shaping your product.  

Just my purview.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter. 

[hippoland]

The state of Q2 2018 pre-seed/seed-stage fundraising: Part 1 - crypto version

This year has been crazy in the fundraising landscape.  The fundraising landscape in 2018 for pre-seed and seed-stage companies has changed a lot even in just the first few months of this year.  

This is what I wrote in Q1 2018 about the fundraising landscape.  

Now in Q2, things are a bit different.  I’ll be breaking this down into 2 blog posts. Part 1 (this one) is about the token-based fundraising landscape.  Part 2 will be for pre-seed/seed companies raising traditional equity / debt / convertible security rounds.  

Even though most of my audience is probably more interested in Part 2, it's important to cover what is happening in the crypto fundraising landscape first because investor behavior in this world affects the pre-seed/seed landscape.  

DRIVERS:

A boatload of VCs are trying to get exposure to cryptocurrencies.  (Sorta)

Some VCs are doing token buys.

Some VCs are not set up to do token buys per their legal docs for their funds.  Or their investors in their funds (their LPs) are not keen on their doing token buys.  

Some VCs who were not set up to do token buys before per their legal docs are now making amendments in their legal docs to be able to do so.

Some VCs are less interested in token buys now than a few weeks ago, as alt cryptocurrencies are down in value.  

TRENDS & TAKEAWAYS:

1) Investors who are able to do token buys are active.  But, they are not "the usual suspects" (mostly).

In some cases, you see well known Sand Hill VC firms doing token buys - Sequoia, for example.  But in most cases, traditional VCs are not participating (or much) for the reasons above.  

But, there are new VCs who are specialized -- focused solely on cryptocurrency buys.  And some of these are pulling away and building brands in the crypto space.  My hypothesis is that there will be a real shake up in how deals are done in startups, and you’ll see turnover as some of these new brands overtake older well-established VC firms.   (This is an aside for another blogpost)

And then there are also syndicates.  These are groups of angel investors -- individuals who are pooling their money together to purchase tokens.  These syndicates are often a bit "underground", so you won’t be able to find them by researching via Google.  But a good place to find these groups is actually at tech companies.  Just about every tech company has a club of cryptocurrency enthusiasts.  From there, you can find various syndicates.  Syndicates also know other syndicates.  Even though syndicates are comprised of angels, you'd be surprised how much money a syndicate call pull together -- it's not uncommon for some of these syndicates to pull together a few million dollars in a given deal and do deals regularly (perhaps less so now that it's crypto winter).

2) These cryptoinvestors are not buying tokens at the ICO

Most cryptoinvestors I know are trying to buy tokens pre-ICO and often in companies who are doing token sales discreetly.  

I think there's a misnomer that VCs are participating in ICOs.  They aren't.  They want to buy tokens before the public does at a better price.  Moreover, most companies I'm seeing these days who are doing token sales are not even doing ICOs.  They are just doing private sales directly to various investors / investor groups.  

This is because it's pretty involved to do an ICO.  And you have to worry about SEC compliance A LOT.  As well as potential hacking / fraud issues that could arise.  These companies are publicly announcing their upcoming token sale (without committing to dates) and are using those announcements to generate interest that is converted into private direct sales of tokens.  

3) You now need some "traction" to successfully do a token sale (sorta)

Unlike last year when you could raise money more or less just on an idea and raise $50m, the "traction bar" has increased for doing a token sale.  We're still not talking about loads of traction -- and it depends on if you are launching a protocol or an app -- but there is a bar.  

The bar for protocols is basically a solid idea with some development and a really reputable team. (even if it will take a long time to fully build).  In contrast, the bar is incredibly high to build an app (decentralized or not).  In many cases, you need a community of users already (in addition to a product) in order have a successful token sale.  These days, many investors are very much leaning towards funding protocols with potential strong tech over apps.  Here’s a good paper on why this is (though I don’t entirely agree w/ his conclusions, but that is also for another blog post) 

4) Larger established companies are doing token sales

Interestingly enough, to the latter point, part of the reason the bar for apps is increasing is that I'm now seeing centralized apps -- existing startups that are at the series A through enterprise level prepare their token sales.  So if given the choice to buy into a token of a company that is already thriving vs a new app, many investors would choose the former, right?  A series C marketplace that has millions of users is a lot more derisked than an idea-stage marketplace.  

5) Centralized apps are doing token sales

Stemming off of point 4, companies that are doing token sales today are not necessarily decentralized.  Or rather their projects may technically be decentralized but the tokens will be used in a very centralized use case.  A lot of blockchain enthusiasts may find this appalling.  Afterall, one of the drivers of blockchain is this notion that centralized large companies should NOT hold your data.  (and technically they are not but their blockchains are for the purpose of furthering a centralized, for-profit company)

I think this is an interesting concept.  I think moving forward, we will see many companies do token sales -- even companies where blockchain is not at the core of the business.  My prediction - and I could be totally wrong - is that we will see a new type of crowdfunding of utility tokens for centralized apps.  Basically, early customers buy into a new startup's token at a special price, and those customers benefit from that price if the company does well.  But this is just my prediction of where I think the market is headed.  

6) Because the bar for token sales has increased, blockchain companies are raising equity-based pre-seed rounds

Funny enough -- in 2017, a number of companies who could not raise from VC did successful ICOs.  Now in 2018 (Q2 specifically), a number of companies who cannot raise on a token sale are running to VCs to do pre-seed raises!

What I"m seeing here is that a lot of VCs who are not able to get into token sales (i.e. are not able to legally do token buys or their investors don't want them to etc) are investing in blockchain companies on a convertible note or convertible security and then are receiving promises of X number of tokens during a later token sale.  

This has become a common way for pre-seed blockchain companies to raise money.  

7) Token-sale raises are becoming smaller

Investors becoming more wary of large raises.  Startups are doing much smaller token sales (and I'm glad)!  I think that discipline in a startup is important.  If you are basically at the beginning of your startup and someone gives you infinite resources, you still would not be able to increase your progress substantially.  The adage that 9 women cannot incubate a baby in 1 month is apt here.  

That being said, raises still have to be substantial in the crypto world, because there are a lot of additional considerations that don't apply to the equity world.  

A) It takes millions of dollars to get your token listed on an exchange, which people need for liquidity.  For top exchanges, it could be as much as $2m-$5m per exchange.  

B) Operations costs more.  Legal / accounting / other services providers related to tokens = your bill will be substantially higher.

So, even if in the net you want to raise say $5m, you're probably looking at raising $10-$15m to cover your other costs.  

8) It's crypto-winter, so investors are a little more shy to move forward even if you have some progress

There's still a lot of crypto money floating around.  But, investors are a little more shy to move forward since alts are not doing well right now.  (and you now have competing token sales from larger companies -- see #4).  

9) Companies raising on a token need a concrete liquidity and currency plan

In 2017, investors were willing to take a flyer on projects who had built some semblance of a community.  In 2018, liquidity has proven to be very important.  So, it's important to have exchange-connections, money to get on an exchange (or if you are really good friends with people at exchanges, you can get prioritized for free), and a plan / timeline for when your token will become liquid.  In addition, thinking through the offering -- number of tokens / release of tokens / etc is also really important.  

In some sense, your success here will be based on whether you can play mini-fed.  It’s not about your white paper.  

This is something we've been talking with a number of companies -- both big and small -- about.  How you run your token sale is something that isn’t core to people’s businesses but is really important!  And I’m happy to chat with more companies thinking about doing this if they want (time permitting).

So wrapping this all up, if I were starting a blockchain startup today, I would get at a minimum get a prototype / early version of my tech working (for a protocol idea).  And as an app, I would get a full v1 product and start pulling together community.  For the former, you can probably raise if the tech is strong.  For the latter, you may need to do a pre-seed round with traditional investors and give investors future tokens if you cannot jump straight to a token sale.  I would plan for any token sale to take months -- partly to raise but partly to make sure that you are fully in compliance.  And, it is important to have strong legal counsel and think through the costs of this legal counsel (plus the cost of getting on exchanges) as part of planning a fundraise.  

But this is just my $0.02, and I’m sure my thoughts will change as we move towards Q3 of this year.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter.

[hippoland]

Surprising findings from our 2017 investments

I took a look at what we invested in in 2017 and thought I'd share some surprising / not surprising findings.  I realize that investors are often a black box, where it's hard to understand what they prefer and what their biases are.  Hopefully by sharing some of these stats it will help illuminate what we care about.  

Note: these stats are based off first checks we did in 2017 under Hustle Fund -- I did not include follow-on checks.  

1) We invested in many places but not in enough places.

Our mandate is to invest in US / CAN entities, so almost all of our investments are concentrated in the US and CAN from a geographical perspective (except for 1 company).  All are legally incorporated in the US and CAN.  Here’s the breakdown from last year: 

Some quick thoughts: 

A) We invested in way more Bay Area companies than we had anticipated.

B) We made no CAN investments!  :( 

C) Though we did no investments in TO/Waterloo, Atlanta, Boston, and really anywhere in the midwest in 2017, we have done a TON of investments in these locations in the past and will likely look heavily there in 2018.  A big reason for this skew is that we’d known a few companies -- either colleagues / friends / or founders we’v worked with before, whom we wanted to back right out of the gates.  In the long run, however, on this fund, I expect the Bay Area to consist of around 35-40% of our investments.  

2) Almost half of our companies have at least one female founder.

47% of our portfolio companies have at least one female founder.  In most cases, she is the CEO.  Although this is probably better than most VC portfolios, in the long run, I think we can still do better.  

Note: for this stat (as well as the next one on race), we asked our founders to self-identify.  What I would love to understand, though I think it’s impossible, is what the overall funnel looks like.  I can’t tell you if 47% is actually a good number or not, because I don’t know what percentage of the companies who are pitching us have at least one female founder.  (We do not ask about gender or race of our applicants).  

That being said, my intuition is that the vast majority of pitches that I get have at least one female founder.  I don’t know if that is because my networks are different from Eric’s.  Or if women prefer to pitch to female investors.  Or if it’s purely coincidence.  But, I suspect there is something interesting here, where you can make a strong case for having funds run by GPs of different backgrounds and networks.   

Lastly, pitches that start out as “I am a female founder” actually make me think that a founder doesn’t know how to run a business.  Investors are in the business to make money; I really don’t care about what you identify as - as insensitive as that sounds.  I’m doing this to make my investors money (and hopefully some for me too :) ).  Here in the US, green is always green.

3) The racial diversity in our portfolio is ok but could be a lot lot better.

Again, these stats are based off of self-identification.  One thing I noticed is that our mixed-founders identify as “other”, so if someone is say half Black and half Asian and identifies as “other”, he/she does not get included in any of the below stats.  

20% of our companies have at least one Black founder.

7% of our companies have at least one LatinX founder. 

53% of our companies have at least one Asian founder. 

53% of our companies have at least one White founder.

None of our founders identify as Native American.

I am happy with this start, and our portfolio is probably better than most VC portfolios, but I’m sure we could do a lot lot better and have a number of efforts for later this year.

Again, I would've loved to have examined the pipeline of companies we looked at but did not invest in, but this is just not possible logistically. 

4) We do not always meet our founders in person.

In 27% of our investments, we still have not met the founding team in person.

I think this is pretty unusual for most VCs.  There are a few premises of why this is possible: 

I’ve hired a lot of remote folks before for my startup, so remote-coaching, which is a lot less hands-on certainly works 

This allows us to invest in geographies where we are not physically located

You don’t actually really know-know people based on location; it’s based on time and interactions

Business success is based on results, and I can see that in other ways

In addition, I usually try to have most of my initial conversations with people over email before we hop on a call.  This is a tip I learned from my mentor David Hauser (founder of Grasshopper - acq by Citrix) who actually invested in my company LaunchBit over email!  It’s a lot more efficient to cut to the chase and not waste anyone’s time in an email, and I can send a quick email with a couple of questions at midnight.  

I suspect, but have no data, that this process of first talking concretely about a business over email and then moving people to a phone call actually removes a lot of unconscious biases.  I have no idea what people look like or how they dress or if they’re pregnant or whatnot.  Again no proof though.

What I ultimately care about is speed of results.  

5) We skewed towards B2B companies.  

As I’ve mentioned in a prior post, we are certainly biased towards B2B companies!  

43% of our companies are B2B companies.  But even the companies I’ve put into other categories are also either B2B SaaS companies OR have a B2B partnership model to get consumers.  

I'm not sure whether stating this will either attract more B2B companies or deter consumer companies, but regardless, I thought that I would mention this stat.  We do try to keep an open mind going into all deals, but clearly we have our biases as you can see here.

In 2018, though, I can tell you right out of the gates that we’ve been doing so much more in blockchain.  So, we’ll see a bit of a sector skew.  

6) We invested very early in 2017.  And love Lean Startup 101.  

60% of our companies were extremely early.  I.e. product was rudimentary / concierge-based MVP / etc.  But a common characteristic of most of these companies was despite essentially having no product, almost all the companies we backed had some sales.  Many of these founders hustled sales before having a strong or fully-fleshed out product.  You might assume that the typical Hustle Fund founder profile is sales or marketing oriented, but this isn't necessarily so.  Some of these teams only have product / engineering founders, but the impetus behind having a limited product is to make sure that you're constantly learning from customers / users and that you're only building out what users/customers want - resulting in faster iterations.  

Essentially we really like founders who are very good AND FAST at the Lean Startup Methodology.  This is something we are quite biased towards -- getting results even before having a full-fledged product to inform product decisions. 

BUT, as I’ve written about before, 2018 is a different fundraising landscape (and still changing!).  And, so we are looking for more traction in our 2018 investments in most categories than in 2017.  Part of this is that our founders will need to achieve more in order to get to their next round.  And, by investing too early with such a small check, there’s a long time span between our check and the next round.  And as a small investor, we need our companies to get to the next round with very little capital.  

Hopefully these stats are illuminating.  In 2018, I think we will see a lot of changes along geography and race as we ramp up our own activities.  We will likely see little to no changes along gender lines.  And I suspect we will see some changes in sector (more blockchain & health) but still tons of B2B in some way or another.  And probably lots of changes in traction levels as well.   Just my prediction right now, but we’ll see at the end of this year.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter.

[hippoland]

How I invest as a pre-seed investor?

One of the reasons I started this blog in the first place is that I think the process of raising money is a black box.  I think we’ve made a dent in getting information out there, but at the pre-seed level, it’s still fairly unclear what investors are looking for, because how do you assess a company when there is nothing / not much to show??

I can’t speak for other VCs, but here’s what I’m looking for:

1) What is the problem you are trying to solve and for whom? 

I can’t stress this one enough.  This is probably the single-most important thing to me but as I mention here, it’s probably the number one area that entrepreneurs prepare the least for.  

I’ll give you an example with my own startup LaunchBit and how our understanding of the problem and the customer became more refined over time: 

V1: Helping online marketers get customers profitably.

V2: Helping online marketers who have previously bought ads in email lists get customers profitably. 

V3: Helping directors of marketing at series B companies who have previously bought ads in email lists get customers profitably.

V4: Helping directors of marketing at series B B2B SaaS companies who have previously bought ads in email lists get customers profitably. 

V5: Helping directors of marketing at series B B2B SaaS companies who have previously bought ads in email lists and are doing lead generation for free trials / webinars / and content get customers profitably.

Etc... 

At the pre-seed stage, a big way to stand out is if you have a V3 statement (as opposed to a V1 statement). 

The way you get to a V3 statement is to start running the business and charging customers.  Almost all of the companies we invested in in 2017 had customers even if they didn’t have much of a product.  Those who didn’t have a product or much of a product used a concierge model of sorts ala Lean Startup philosophy to start running their business.  By just getting started and exchanging money was how you can learn more about your customer persona and his/her daily life and what makes him/her buy. 

Another way to get to a V3 statement is to have been in the industry before and to have experienced your own problem. 

At a V3 level of understanding your problem and the customer, you will still have lots of questions and potential customer segments who could be a good fit for your product.  So we are not looking for all answers to be resolved, but some narrowed scope is a big divide between those who are ready for pre-seed funding and those who are not.  

Although this post is about what I look for, every investor (incl pre-seed investors) looks for this.  

2) What is the business model and the potential unit economics? 

This one is pretty investor-specific.  Certain investors tend to gravitate towards certain business models.  

This post by Christoph Janz at Point Nine focuses more on the market size, but it gets at business models indirectly and is a very good post to read.  

At a high level, business is simple! :) You bring revenue in and your costs send money out the door.  You want your revenue to be higher than your costs.  

But the execution is hard.  Do you spend lots of time going after big money (enterprise customers)?  Or spend virtually no time going after small money (ala Facebook)?  Or in between?  When you’re talking with an investor, I’d say in general, he/she has biases towards the customer acquisition methods that has made him/her money before.  I.e. if he/she made money on pure consumer businesses, then he/she will gravitate more towards swatting flies (see Christoph’s post).  And, if you have a business that involves getting lots and lots of consumers onboard to pay small amounts of money, that is probably the type of investor you want to work with anyway, because he/she will have insights from past learnings / companies.  

For me, I’m very much in the deer-hunting category according to Christoph’s post. I’ve also done some rabbit deals.  Investors have their biases towards certain business models based on past experiences, and my biases are based on running my company LaunchBit (which was a deer-hunting model) as well as the companies I’ve funded over the last three years. 

The reason I like deer-hunting businesses is that from my own experiences, I can see a clear path to bring in sales profitably.  You charge a high enough (i.e. high lifetime value) price such that you can get customers through partnerships / outbound sales / lead gen + inside sales / etc which generally also have some fair cost to acquire customers.  But, it’s not so high such that only a small number of people can pay for it, so you don’t have to get the sales process perfect as a first-time entrepreneur or be a super salesperson.  And I understand the nitty gritty operations required to do these customer acquisition methods, so that gives me conviction that with the right team, this type of business can fly.   

On the flip side, I am definitely the wrong person to help with a fly-business.  I know nothing about viral marketing.  I don’t know how you get that many customers at scale without spending a lot.  I’ll pass on those companies, because I don’t understand these types of businesses well enough to get involved.  It certainly doesn’t mean these are bad businesses!  (Facebook / Twitter / Snap / et al are proof of that!)  It just means I’m the wrong investor-fit.  I’ve also passed on a lot of mice and elephant companies too, because the unit economics feel too difficult to me.  The reason it feels difficult to me is that I just don’t know how to get customers profitably.  But there are lots of investors out there who do know how to do enterprise sales or how to get lots of small customers at scale.  

There are cases where I’ve ended up becoming an elephant or a mice (or a fly) investor, but that’s been in situations where either the entrepreneur clearly knows how to get these customers (i.e. is an excellent marketer) or the company has pivoted.  

Now here’s the thing - at a given firm, each individual investor has his/her own biases.  If a fund has a champion model (which we do), when an individual at a fund decides to invest, the fund invests.  If an individual at a fund passes, the whole fund passes.  So, if you can, you’ll want to chat with the person whom you think is best aligned with your company.  I think all-too-often entrepreneurs try to pitch someone at a fund to build rapport based on external factors -- e.g. female entrepreneurs tend to pitch me more than Eric.  Or if you went to the same school as one of us.  Or grew up in the same town.  But, I think business-model-gravitation should be a big factor in whom you decide to pitch.  I.e. how has this investor made money before?  He/she will certainly be biases towards that.  

I can’t speak for my business partner Eric, but he has had a lot more experience with building businesses and side projects with smaller lifetime values.  So if you have a mice-business model, you might be better off trying to pitch him than me?  

3) Can I get behind the thesis? 

At the pre-seed level, all investment decisions for all firms / investors are driven by thesis-alignment.  I.e. am I bought into that this is a real problem and am I bought into this potential solution?  

Here’s a concrete example of what I mean: when I was pitching LaunchBit, we started out as an ad network for email.  All the investors whom I pitched who believed that email was dead didn’t invest.  All of the people we pitched who became our investors had at least one other portfolio company that was doing something in email.  

At the pre-seed stage, there is no way to prove that your thesis is right or wrong.  So if an investor isn’t onboard, just move on quickly.  And that’s ok.  In fact, the best companies are the ones with strong theses.  It also means that potential investors will be very bifurcated in their opinions.  Let me give you a few examples of companies that have strong theses that are very bifurcating: 

AirBnB -- investors either believed people would sleep on other people’s air mattresses or not

Uber -- investors either believed people would ride in other people’s cars or not

Those van companies that double up as hotels -- investors either believe that people are willing to do this or not

Anything bitcoin -- investors either believe that bitcoin (or other cryptocurrencies) is massively undervalued or should go to zero; I don’t know anyone who thinks the status quo is here to stay

Investors are going to be wrong in their theses.  So, just because someone isn’t onboard because of your thesis, that doesn’t mean that it’s a bad thesis.  It’s a matter of finding the right investor who agrees with it.  

4) If sh*t hits the fan, can the company survive (and grow) on my $25k check? 

As a small pre-seed fund manager, I have very different concerns from the Sand Hill VCs.  The Sand Hill VCs will support you in every round (if they think you’re good).  For me, I will write a $25k first check.  Maybe I might write another check later, but it won’t be that big, and I certainly don’t have enough money in my fund to lead your next round.    

As a result, I won’t be a signaling risk to you, but it also means that I have to think a lot about downside risk.  If you are in a really competitive space where it will take a lot of capital to compete and outspend everyone, I might decline to invest for that reason.  I certainly understand that often it’s the 8th player who comes in and wins (ala Google and Facebook) but I don’t have the capital to play in those games.  This comes back to investor fit -- the big firms are much better poised to fund these highly competitive spaces not small firms like mine.  That being said, most of the time, entrepreneurs don’t know if they are in a competitive space or not until they start fundraising.  So once you start raising money and if you hear from a few investors that your “space is too crowded”, you might want to think about how it informs your fundraising strategy.  I.e. it might be difficult to raise money at the early stages, because most investors in the seed space have smaller funds (esp pre-seed funds).  Once you get to breakout success, raising money from the bigger Sand Hill funds could be easier.  So you might think about how to best poise yourself to bootstrap and get to profitability for the next couple of years.  Chances are if 3 investors tell you your space is “crowded”, this is a good proxy for what most investors think, and smaller funds will be harder to bring onboard.  Your wildcards for external funding at the pre-seed stage are angel investors -- generally people who know you and are betting on you (and the less active ones may also not see enough deals to know whether a space is crowded :) ).  

In addition, going back to #2, I have to believe that you can make money pretty early in your business life in case no one funds you again (or for a while).  Because my $25k check isn’t going to last long.  Bonus if my coaching can help you escalate that, but the business model itself has to print money immediately.  Long sales cycles or signed contracts that won’t pay you for months is tough as a small investor (ala elephant hunting).  Similarly, consumers who pay you $5 per month need to be coming in droves in order to get you to significant sustainable revenue.  

5) Lastly, and most importantly, does the team execute with speed? 

This is specific to what I look for and not other investors per se.  But I want to clarify what it means to execute with speed.  This means that you are making fast progress on the top thing that matters.  For most companies, this is usually sales.  In some cases, product & technology.  

Let me give you a couple examples of companies that we backed that we were impressed by: 

My first investment on this fund: CEO started selling to top tech companies even while it was a side gig and even before she had a product.  She did about $10k in sales that first month.  

Another investment: Co-founding team started selling in-person at 5am to their target demographic (that was up at that hour) and hacked together a Shopify store to deliver v1 of their product

We have also backed teams where the product is really technical and the risk is technical not market risk.  In those cases, we want to understand how the team sprints and thinks about getting the simplest robust product to launch.

In contrast, there are a lot of teams that spend a lot of time and hard work doing research (market research), surveys, customer interviews, etc.  That’s ok, but most people cannot articulate what product they want or what they will pay for.  From my own operator experience, the best way to learn and iterate is to actually start working with paying customers.    

Note there are a lot of other important things that I didn’t mention: market size and team.  These are going to be really important for other investors.  For me, strength of the problem is usually correlated with market size (not always but most of the time) and execution with speed is correlated with team.  

So, in conclusion, to me, pre-seed doesn’t mean just sitting around with an idea.  To me, it means the beginning stages of building the company and learning and iterating on those learnings quickly.  I am not looking for loads of traction but the ability to have a conversation with a team about what they’ve learned each new week based on something new they tried in their sales or product development the prior week.  And if you can do that week over week, you’ll hit some level of success.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter. 

[hippoland]

The downfall of middlemen businesses

I think we’re at a really interesting time with technology.  We are going to see a lot of software “middle(wo)men businesses” be replaced.  Payment processing companies.  A lot of marketplaces.  Businesses where there are two sides and some company sitting in the middle who doesn’t provide much value -- these are the kinds of companies that are going to be disrupted soon.  On the flip side, this is a great time for entrepreneurs who are just starting out and thinking about new opportunities.  

But let’s take a step back for a moment run through a quick history of the web. 

Since the 90s, software companies have moved away from desktop software - CD ROMs, floppy disks, and whatever else we use to rely on that we cannot even remember anymore.  Software moved online, and data is now stored in the cloud - not on a local server in your office.  This is/was a good thing.  It’s incredibly convenient to be able to access software anywhere in the world with any computer or mobile device.  But it’s now become also a bad thing.  We’ve seen the rise in hacking of databases.  (Thanks Equifax for leaking everyone’s SSNs!)  We’ve seen some companies get to be so big and they have all of your data.  Some of these companies are selling or giving away your data to other people without you knowing about it.  Maybe it’s ok that Yahoo! mail got hacked, and those hackers can have fun with all of my Groupon daily coupons and other newsletters.  But, it’s become clear that this model isn’t perfect for everything. 

This is where blockchain technology comes in.  What if instead of one company holding all of your data in a central database you flip the model around?  Instead, why don’t we make data available and open in the public with privacy settings that you, as the consumer, own and control?  And every transaction is also made public with redundancy so that there are no disputes about what records have happened.  And what if to accomplish this, we rope in a lot of people who can be these nodes of information in this distributed ledger instead of one party?  

In the beginning, blockchain sounded like it could only applied to niche use cases that required a lot of security and privacy.  But actually, I think this can be applied to a lot of use cases for other reasons -- to connect two sides in transactions.  

For example: take ad networks.  Ad networks have advertisers who want to buy ads.  And publishers who want to make money by serving ads.  And the ad networks who sit in between will often take 20-70% cut.  In other words, if I’m a marketer buying an ad at $100, the publisher might receive anywhere between $30-$80.  Some ad networks are incredibly valuable -- they provide useful targeting and ad serving technology.  Others are not and just take a massive cut in between.  

Now imagine a world where someone built ad tech and offered it for free to match advertisers and publishers?  They take no fee in between.  I guarantee you that the ad networks who provide no value will be wiped out quickly, because marketers will all flock to buy ads that are significantly cheaper.  And publishers would prefer to make more money.  

So let’s say we start this company -- call it Hippo Ads.  With blockchain, we can do this with Hippo Ads.  We will rely on others to be information nodes -- we won’t need a central database.  We will provide the software to keep track of the ad buys and who gets what payments.  We also provide software to match advertisers and publishers.  AND, we take no fee for this.  

And here’s how we make money: we can offer a currency called Hippo Coin.  You can only buy ads and get paid with hippo coin.  And there’s a limited supply of Hippo Coin.  We at Hippo Ads will hold some of the coins that we’ll vest upon hitting certain milestones.  And since there is a limited supply of Hippo Coin, if this ad network gets to be so valuable -- i.e. everyone wants to buy and sell ads, then the value of Hippo Coin against the dollar goes up, and we employees and founders at Hippo Ads will make money by holding some of that currency and making a good product / service. 

So now we take this train of thought a step further.  Any two sided platform or marketplace that takes a fee in between could potentially be disrupted by applying the same model.  Right? 

Now, not every marketplace or two-sided platform will be disrupted.  Let’s say you have a marketplace and you are charging a 15% fee in between the two sides.  If your customers are finding your service valuable and are happy to pay you that fee because you provide great service or great product / technology, then you likely won’t be disrupted.  But if you find that people are trying to skirt you to save money, then this could be a better model and something to either adopt or watch out for from would-be competitors.  In addition, there are other criteria to consider: 

1) Old industries won’t adopt this model in the near term

Because utility tokens are so new and hard for most people to work with, the industries that will be disrupted first will be the ones where the two sides are quite tech savvy.

2) Tackling tech savvy, fast-moving incumbents is not a good strategy

I see blockchain companies trying to use this distributed ledger model to take on their “centralized” counterparts who are also still very mobile, well-funded tech companies who will be able to either counter by either offering a token themselves or will outpace building both sides of the marketplace faster.

3) Latency is a strong consideration

Although a lot of two sided marketplaces and platforms don’t need information transmitted in real-time, some use cases have serious latency considerations.  Programmatic ad-serving, for example, has to be super fast.  Consumers won’t wait around for 5s for a banner ad to show up.  And blockchain won’t serve these use cases well.  

Just some things to think about as you either pursue your next opportunity or look at who is chasing you.  

Fundraising is a nebulous process that I aim to make more transparent.  To learn more secrets and tips, subscribe to my newsletter.